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Sovereign Rating News and Financial Markets Spillovers: Evidence from the European Debt Crisis

Author/Editor: Arezki, Rabah | Candelon, Bertrand | Sy, Amadou N. R.
Authorized for Distribution: March 1, 2011
Electronic Access: Free Full Text (PDF file size is 1,046KB)
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Disclaimer: This Working Paper should not be reported as representing the views of the IMF. The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate.

Summary: 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.
 
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Series: Working Paper No. 11/68
Subject(s): Announcements | Bonds | Capital markets | Credit | Cross country analysis | Eastern Europe | Financial crisis | Public information notices | Sovereign debt | Spillovers
Author's keyword(s): Credit Ratings | News | Spillovers | Financial Markets
 
English  
    Published:   March 1, 2011        
            Format:   Paper
    Stock No:   WPIEA2011068   Pages:   27
    Price:   US$18.00 (Academic Rate: US$18.00 )
       
     
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