The investment grade and funds’ portfolio allocation in Greek assets

Haris Giannakidis, Louis Karathanos, Athanasios Kontinopoulos, Athanasios Lampousis and Petros Migiakis
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Haris Giannakidis: Bank of Greece
Louis Karathanos: Humboldt University of Berlin
Athanasios Kontinopoulos: Bank of Greece
Athanasios Lampousis: Bank of Greece

Economic Bulletin, 2024, issue 59, 7-24

Abstract: The importance of investment funds for the global economy has increased in the aftermath of the global financial crisis. In the present paper, we focus on the case of Greece and the developments in investment funds’ portfolios, with a special emphasis on the period before the sovereign credit rating upgrade of Greece to investment grade. By means of a differences-in-differences estimator, we find that, in the aftermath of the change in Greece’s sovereign credit rating outlook to positive by the rating agency Standard and Poor’s (S&P), investment funds increased their holdings of Greek sovereign bonds in relation to other comparable euro area sovereign bonds. Next, in a dynamic panel data model setup we find that this increase in investment funds’ positions in Greek government bonds (GGBs) explains about 80% of the reduction in Greek sovereign bond spreads. Our results highlight the strong association between investment funds’ portfolio allocation and the underlying assets’ credit ratings, and provide incentives for continuing reforms that may lead to rating upgrades, as a means of increasing demand for Greek sovereign bonds and controlling the cost of debt. This is especially important when the monetary policy environment becomes tighter and interest rates, as well as the cost of funding, increase.

Keywords: Demand-based asset pricing; investment funds; sovereign bonds; credit ratings (search for similar items in EconPapers)
JEL-codes: F21 G12 G15 G24 H63 (search for similar items in EconPapers)
Date: 2024
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