Do Sovereign Re-Ratings Destabilize Equity Markets During Financial Crises?: New Evidence From Higher Return Moments

Journal of Business Finance & Accounting, Forthcoming

34 Pages Posted: 7 Dec 2012 Last revised: 21 May 2015

See all articles by Robert D. Brooks

Robert D. Brooks

Monash University; Financial Research Network (FIRN)

Robert W. Faff

University of Queensland

Sirimon Treepongkaruna

The University of Western Australia; Financial Research Network (FIRN)

Eliza Wu

The University of Sydney - Business School; Financial Research Network (FIRN)

Multiple version iconThere are 2 versions of this paper

Date Written: March 5, 2015

Abstract

We investigate the effects of S&P’s sovereign re-ratings on the higher moments of equity market returns over recent financial crises. Using a set of intraday stock market index prices and sovereign credit ratings for a sample of 36 countries which experienced sovereign rating changes over the period from 1996 - 2013, we find that the higher moments of stock market returns are significantly more responsive to sovereign re-ratings during financial crises but the effects on stock markets are not the same across different financial crises. The effects during crises are however magnified for large downgrades and those that are associated with a loss of investment grade status. We find that there are asymmetric effects during financial crises in that downgrades are consistently more significant than upgrades in increasing realized volatility and realized kurtosis. Both upgrades and downgrades affect realized skewness in times of crises in the expected direction.

Keywords: sovereign ratings, realized volatility, realized skewness, realized kurtosis, stock market impact

JEL Classification: G15, F30, F31

Suggested Citation

Brooks, Robert Darren and Faff, Robert W. and Treepongkaruna, Sirimon and Wu, Eliza, Do Sovereign Re-Ratings Destabilize Equity Markets During Financial Crises?: New Evidence From Higher Return Moments (March 5, 2015). Journal of Business Finance & Accounting, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2186275 or http://dx.doi.org/10.2139/ssrn.2186275

Robert Darren Brooks

Monash University ( email )

Wellington Road
Clayton, Victoria 3168
Australia

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

Robert W. Faff

University of Queensland ( email )

St Lucia
Brisbane, Queensland 4072
Australia

Sirimon Treepongkaruna

The University of Western Australia ( email )

35 Stirling Highway
Crawley, Western Australia 6009
Australia
+61864887853 (Phone)
+61864881086 (Fax)

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

Eliza Wu (Contact Author)

The University of Sydney - Business School ( email )

University of Sydney
Darlington
Sydney, NSW 2006
Australia

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

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