Download This PaperThe Sovereign Yield Curve and Credit Ratings in GIIPS
International Review of Finance, 2020
28 Pages Posted: 15 Feb 2018 Last revised: 7 Apr 2020
Date Written: September 5, 2017
Abstract
This paper studies the impact of sovereign credit rating and outlook changes on the shape of sovereign yield curve. The data sample consists of five peripheral European countries known as GIIPS (Greece, Ireland, Italy, Portugal and Spain) over the period of 01 January 2001 to 30 June 2016. We use dynamic Nelson-Siegel model to estimate the level, slope and curvature of yield curve and subsequently, Vector Autoregressive model to estimate the effect of sovereign rating and outlook changes on the sovereign yield curve. We find significant effect of rating downgrades and insignificant effect of rating upgrades in all the five countries; however, find mixed results for the effect of changes in outlook status. We find some peculiarity in the behavior of Portuguese yield curve that is explainable under preferred habitat theory. A battery of sensitivity tests also validates the results.
Keywords: Sovereign Credit Ratings, Sovereign Bonds, Yield Curve, Dynamic Nelson-Siegel Model, GIIPS
JEL Classification: C32, E43, G12, G24, H60
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