The European Sovereign Debt Crisis and Its Impact on Bond and Stock Markets: Market Considers It a Long Term Crisis
35 Pages Posted: 27 Sep 2013
Date Written: September 25, 2013
We take advantage of the historical onetime event of the European sovereign debt crisis and investigate the impact of European sovereign downgrades and negative watches on the European government bond and stock market including the partial default of Greece in March 2012. Results are based on an unprecedented large sample of 159 rating events on industrial countries covering 10 years of data from 2002 to 2012. While European government bond and stock markets react significantly negative upon bad rating news, it is especially government bonds with longer times to maturity that suffer the most. This implies that the current European sovereign debt crisis is considered a long term crisis. Analyzing each country separately, we find no reaction on the respective government bond markets for any country, but significantly negative effects on the national stock indices of Greece, Portugal, Spain, and Slovenia. The partial default of Greece does not create negative spillover effects on bond and stock markets of the whole Eurozone or the group of troubled southern economies, but rather positive spillover effects on the northern European countries.
Keywords: Sovereign credit ratings, European debt crisis, Government bond market, Stock market, Event study
JEL Classification: E44, G12, G14
Suggested Citation: Suggested Citation