Does Sovereign Debt Ratings News Spill Over to International Stock Markets?

Posted: 8 May 2007

See all articles by Miguel A. Ferreira

Miguel A. Ferreira

Nova School of Business and Economics; European Corporate Governance Institute (ECGI); Centre for Economic Policy Research (CEPR)

Paulo M. Gama

University of Coimbra

Abstract

The evidence here indicates that sovereign debt rating and credit outlook changes of one country have an asymmetric and economically significant effect on the stock market returns of other countries over 1989-2003. There is a negative reaction of 51 basis points (two-day return spread vis-á-vis the US) to a credit ratings downgrade of one notch in a common information spillover around the world. Upgrades, however, have no significant impact on return spreads of countries abroad. Closeness (e.g., geographic proximity) and emerging market status amplify the effect of a spillover. Downgrade spillover effects at the industry level are more pronounced in traded goods and small industries.

Suggested Citation

Ferreira, Miguel Almeida and Gama, Paulo Miguel, Does Sovereign Debt Ratings News Spill Over to International Stock Markets?. Journal of Banking and Finance, Forthcoming. Available at SSRN: https://ssrn.com/abstract=984762

Miguel Almeida Ferreira (Contact Author)

Nova School of Business and Economics ( email )

Campus de Campolide
Lisbon, 1099-032
Portugal

European Corporate Governance Institute (ECGI) ( email )

c/o ECARES ULB CP 114
B-1050 Brussels
Belgium

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Paulo Miguel Gama

University of Coimbra ( email )

Av. Dias da Silva, 165
Coimbra, 3004-512
Portugal
+351 239 790523 (Phone)
+351 239 403511 (Fax)

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