Credit rating agency downgrades and the Eurozone sovereign debt crises

Christopher Baum, Margarita Karpava, Dorothea Schäfer and Andreas Stephen
Additional contact information
Margarita Karpava: MediaCom London
Andreas Stephen: JIBS

No 177, NBP Working Papers from Narodowy Bank Polski

Abstract: This paper studies of credit rating agency (CRA) downgrade announcements on the value of the Euro and the yields of French, Italian, German and Spanish long-term sovereign bonds during the culmination of the Eurozone debt crisis in 2011-2012. The employed GARCH models show that CRA downgrade announcements negatively affected the value of the Euro currency and also increased the volatility. Downgrading increased the yields of French, Italian and Spanish bonds but lowered the German bond’s yields, although Germany’s rating status was never touched by CRA. There is no evidence for Gander causality from bond yields to rating announcement. We infer from these findings that CRA announcements increasingly influenced crisis-time capital allocation in the Eurozone. Their downgradings caused investors to rebalance their portfolio across member countries, out of ailing states’ debt into more stable borrowers’ securities.

Keywords: Credit Rating Agencies; Euro Crisis; Sovereign Debt; Euro Exchange Rate (search for similar items in EconPapers)
JEL-codes: E42 E43 E44 F31 F42 F65 G01 G12 G14 G24 (search for similar items in EconPapers)
Pages: 39
Date: 2014
New Economics Papers: this item is included in nep-eec, nep-fmk, nep-mac and nep-opm
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Citations: View citations in EconPapers (6)

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Related works:
Journal Article: Credit rating agency downgrades and the Eurozone sovereign debt crises (2016)
Working Paper: Credit Rating Agency Downgrades and the Eurozone Sovereign Debt Crises (2014)
Working Paper: Credit Rating Agency Downgrades and the Eurozone Sovereign Debt Crises (2014)
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Persistent link: https://EconPapers.repec.org/RePEc:nbp:nbpmis:177

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