Sovereign Debt Rating Changes and the Stock Market

Alexander Michaelides, George Nishiotis, Andreas Milidonis () and Panayiotis Papakyriacou

No 8743, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: Using event studies we find statistically and economically significant, negative daily abnormal stock market returns prior to sovereign debt rating downgrade announcements. Instrumental variable techniques show that these findings are more pronounced in countries with lower institutional quality. Our analysis of the frequency and content of news shows that results cannot be explained away by unrelated, concurrent bad news. Instead, we find support for the explanation of leakage, which could take the form of leaked private information to a group of investors, but could also take the form of a rumor that eventually appears in the public domain.

Keywords: Trmi; Event studies; Institutional quality.; International finance; Sovereign ratings (search for similar items in EconPapers)
JEL-codes: G14 G15 G24 (search for similar items in EconPapers)
Date: 2012-01
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Citations: View citations in EconPapers (10)

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Working Paper: Sovereign Debt Rating Changes and the Stock Market (2012)
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