Ratings matter: Announcements in times of crisis and the dynamics of stock markets

Nicoletta Rosati, Mario Bellia, Pedro Verga Matos and Vasco Oliveira

Journal of International Financial Markets, Institutions and Money, 2020, vol. 64, issue C

Abstract: 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)
Date: 2020
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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

DOI: 10.1016/j.intfin.2019.101166

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