The effects of sovereign rating drifts on financial return distributions: Evidence from the European Union

Hung Do, Robert Brooks, Sirimon Treepongkaruna and Eliza Wu

International Review of Financial Analysis, 2014, vol. 34, issue C, 5-20

Abstract: We develop a framework that allows a multivariate system of long memory processes to be conditional on specific regimes to investigate the effects of credit rating agencies' (CRAs) sovereign credit re-ratings on European stock and currency return distributions over the period from 1996 to 2012. We find evidence across rating regimes to support the usefulness of our proposed model in accommodating both long memory and regime switching features. Furthermore, we reveal that the total effects (both direct and indirect forces) of sovereign credit assessments on the first four realized moments of return distributions can be different to their direct effects on individual moments. Thus, we find the rank orders among the three major CRAs to differ for each realized moment and asset market.

Keywords: Sovereign credit ratings; Credit rating agencies; Intraday data; Higher moments; Markov Regime Switching; Long memory (search for similar items in EconPapers)
JEL-codes: C32 F30 G15 (search for similar items in EconPapers)
Date: 2014
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Citations: View citations in EconPapers (6)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:finana:v:34:y:2014:i:c:p:5-20

DOI: 10.1016/j.irfa.2014.05.002

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