Ratings matter: Announcements in times of crisis and the dynamics of stock markets
Pedro Verga Matos and
Journal of International Financial Markets, Institutions and Money, 2020, vol. 64, issue C
In this paper we propose a novel approach in analysing the impact of changes in sovereign credit ratings on stock markets. We study the evolution of a segmented form of the stock market index for several crisis-hit countries, including both European and Asian markets. Such evolution is modelled by a homogeneous Markov chain, where the transition probabilities from one starting level of the index to a new (lower or higher) level in the next period depend on some explanatory variables, namely the country’s rating, GDP and interest rate, through a generalised ordered probit model. The credit ratings turn out to be determinant in the dynamics of the stock markets for all three European countries considered - Portugal, Spain and Greece, while not all considered Asian countries show evidence of correlation of market indices with the ratings.
Keywords: Credit ratings; Financial crisis; Europe; Markov chains; Generalized ordered probit models (search for similar items in EconPapers)
JEL-codes: C25 C58 E44 G01 G15 G24 (search for similar items in EconPapers)
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Working Paper: Ratings matter: announcements in times of crisis and the dynamics of stock markets (2019)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:intfin:v:64:y:2020:i:c:s1042443119300460
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