Sovereign rating actions and the implied volatility of stock index options

Vu Tran, Rasha Alsakka and Owain ap Gwilym

International Review of Financial Analysis, 2014, vol. 34, issue C, 101-113

Abstract: This paper examines the interaction between the equity index option market and sovereign credit ratings. S&P and Moody's signals exhibit strong impact on option-implied volatility while Fitch's influence is less significant. Moody's downgrades reduce the market uncertainty over the rated countries' equity markets. Strong causal relationships are found between movements in the option-implied volatility and all credit signals released by S&P and Fitch, but only actual rating changes by Moody's, implying differences in rating agencies' policies. The presence of additional ratings tends to reduce market uncertainty. The findings highlight the importance of rating information in the price discovery process and offer policy implications.

Keywords: Sovereign ratings; Implied volatility; Stock index options; Price discovery process (search for similar items in EconPapers)
JEL-codes: G14 G15 G24 (search for similar items in EconPapers)
Date: 2014
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Citations: View citations in EconPapers (5)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:finana:v:34:y:2014:i:c:p:101-113

DOI: 10.1016/j.irfa.2014.05.010

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