Sovereign credit ratings, market volatility, and financial gains

Antonio Afonso, Pedro Gomes and Abderrahim Taamouti

No 2014/06, Working Papers Department of Economics from ISEG - Lisbon School of Economics and Management, Department of Economics, Universidade de Lisboa

Abstract: The reaction of EU bond and equity market volatilities to sovereign rating announcements (Standard & Poor’s, Moody’s, and Fitch) is investigated using a panel of daily stock market and sovereign bond returns. The parametric volatilities are filtered using EGARCH specifications. The estimation results show that upgrades do not have significant effects on volatility, but downgrades increase stock and bond market volatility. Contagion is present, with sovereign rating announcements creating interdependence among European financial markets with upgrades (downgrades) in one country leading to a decrease (increase) in volatility in other countries. The empirical results show also a financial gain and risk (value-at-risk) reduction for portfolio returns when taking into account sovereign credit ratings’ information for volatility modelling, with financial gains decreasing with higher risk aversion.

Keywords: Sovereign ratings; yields; stock market returns; volatility; EGARCH; optimal portfolio; financial gain; risk management; value-at-risk. (search for similar items in EconPapers)
JEL-codes: C22 C23 E44 G11 G15 H30 (search for similar items in EconPapers)
Date: 2014-01
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (25)

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Related works:
Journal Article: Sovereign credit ratings, market volatility, and financial gains (2014)
Working Paper: Sovereign credit ratings, market volatility, and financial gains (2014)
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