Sovereign credit ratings and financial markets linkages: Application to European data |
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| Authors: | António Afonso Davide Furceri Pedro Gomes |
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| Institution: | 1. ISEG/UTL – Technical University of Lisbon, Department of Economics, Portugal;2. UECE – Research Unit on Complexity and Economics, Portugal1;3. European Central Bank, Directorate General Economics, Fiscal Policies Division, Kaiserstraße 29, D-60311 Frankfurt am Main, Germany;4. International Monetary Fund, 700 19th Street NW, 20431 Washington DC, USA;5. University of Palermo, Viale delle Scienze, 90128 Palermo, Italy;6. Universidad Carlos III de Madrid, Department of Economics, c/Madrid 126, 28903 Getafe, Spain |
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| Abstract: | We use EU sovereign bond yield and CDS spreads daily data to carry out an event study analysis on the reaction of government yield spreads before and after announcements from rating agencies (Standard & Poor’s, Moody’s, Fitch). Our results show significant responses of government bond yield spreads to changes in rating notations and outlook, particularly in the case of negative announcements. Announcements are not anticipated at 1–2 months horizon but there is bi-directional causality between ratings and spreads within 1–2 weeks; spillover effects especially among EMU countries and from lower rated countries to higher rated countries; and persistence effects for recently downgraded countries. |
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| Keywords: | C23 E44 G15 |
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