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Sovereign Rating News and Financial Markets Spillovers: Evidence from the European Debt Crisis

28 Pages Posted: 5 Apr 2011  

Rabah Arezki

International Monetary Fund (IMF)

Bertrand Candelon

University of Maastricht - Department of Economics

Amadou Nicolas Racine Sy

International Monetary Fund (IMF) - International Capital Markets Department; Brookings Institution

Multiple version iconThere are 2 versions of this paper

Date Written: March 2011

Abstract

This paper examines the spillover effects of sovereign rating news on European financial markets during the period 2007-2010. Our main finding is that sovereign rating downgrades have statistically and economically significant spillover effects both across countries and financial markets. The sign and magnitude of the spillover effects depend both on the type of announcements, the source country experiencing the downgrade and the rating agency from which the announcements originates. However, we also find evidence that downgrades to near speculative grade ratings for relatively large economies such as Greece have a systematic spillover effects across Euro zone countries. Rating-based triggers used in banking regulation, CDS contracts, and investment mandates may help explain these results.

Keywords: Announcements, Bonds, Capital markets, Credit, Cross country analysis, Eastern Europe, Financial crisis, Public information notices, Sovereign debt, Spillovers

Suggested Citation

Arezki, Rabah and Candelon, Bertrand and Sy, Amadou Nicolas Racine, Sovereign Rating News and Financial Markets Spillovers: Evidence from the European Debt Crisis (March 2011). IMF Working Papers, Vol. , pp. 1-27, 2011. Available at SSRN: https://ssrn.com/abstract=1802981

Rabah Arezki (Contact Author)

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

Bertrand Candelon

University of Maastricht - Department of Economics ( email )

P.O. Box 616
Maastricht, 6200 MD
Netherlands

Amadou Nicolas Racine Sy

International Monetary Fund (IMF) - International Capital Markets Department ( email )

700 19th Street NW
Room 9-548
Washington, DC 20431
United States
202-623-8651 (Phone)
202-589-8561 (Fax)

Brookings Institution ( email )

1775 Massachusetts Ave, NW
Washington, DC 20036
United States

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