28 Pages Posted: 5 Apr 2011
Date Written: March 2011
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: 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
By J. W. Verret
By Paul Grauwe