Sovereign credit ratings, market volatility, and financial gains

Antonio Afonso, Pedro Gomes and Abderrahim Taamouti

Computational Statistics & Data Analysis, 2014, vol. 76, issue C, 20-33

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 defined 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, and sovereign rating announcements create 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)
Date: 2014
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Citations: View citations in EconPapers (26)

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Working Paper: Sovereign credit ratings, market volatility, and financial gains (2014)
Working Paper: Sovereign credit ratings, market volatility, and financial gains (2014)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:csdana:v:76:y:2014:i:c:p:20-33

DOI: 10.1016/j.csda.2013.09.028

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