Sovereign Debt Rating Changes and the Stock Market

54 Pages Posted: 20 Jan 2012

See all articles by Alexander Michaelides

Alexander Michaelides

Imperial College Business School; Centre for Economic Policy Research (CEPR)

Andreas Milidonis

University of Cyprus - Department of Accounting and Finance

George Nishiotis

University of Cyprus-Faculty of Economics and Management-Department of Accounting and Finance

Panayiotis Papakyriakou

University of Southampton - Department of Banking and Finance

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Date Written: January 2012

Abstract

We use an event-study methodology to analyze the effect of sovereign debt rating changes on daily stock market returns around the world. We find evidence that the stock market moves before the public announcement of a sovereign rating downgrade, resulting in a significant market reaction prior to the event, weak reaction at the event and a mild correction after the event. The results are much weaker for upgrades. Using instrumental variables techniques we build a causal case to argue that these findings are more pronounced in non-developed markets, in countries with civil (relative to common) law systems, lower measures of law and order institutional quality, and higher measures of corruption.

Keywords: event studies, institutional quality., international finance, sovereign ratings

JEL Classification: G14, G15, G24

Suggested Citation

Michaelides, Alexander and Milidonis, Andreas and Nishiotis, George P. and Papakyriakou, Panayiotis, Sovereign Debt Rating Changes and the Stock Market (January 2012). CEPR Discussion Paper No. DP8743. Available at SSRN: https://ssrn.com/abstract=1988675

Alexander Michaelides (Contact Author)

Imperial College Business School ( email )

South Kensington Campus
Exhibition Road
London SW7 2AZ, SW7 2AZ
United Kingdom

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Andreas Milidonis

University of Cyprus - Department of Accounting and Finance ( email )

P.O. Box 20537
Nicosia CY-1678
Cyprus
+357 22 893 626 (Phone)

HOME PAGE: http://www.ucy.ac.cy/~amilidon/

George P. Nishiotis

University of Cyprus-Faculty of Economics and Management-Department of Accounting and Finance ( email )

Cyprus

Panayiotis Papakyriakou

University of Southampton - Department of Banking and Finance ( email )

Southampton
United Kingdom

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