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On the Asymmetries of Sovereign Credit Rating Announcements and Financial Market Development in the European Region

Chunling Li (), Khansa Pervaiz (), Muhammad Asif Khan (), Faheem Ur Rehman () and Judit Oláh ()
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Chunling Li: School of Economics and Management, Yanshan University, Qinhuangdao 066004, China
Khansa Pervaiz: School of Economics and Management, Yanshan University, Qinhuangdao 066004, China
Muhammad Asif Khan: Department of Commerce, Faculty of Management Sciences, University of Kotli, Kotli, Azad Jammu and Kashmir 11100, Pakistan
Faheem Ur Rehman: School of Economics, Jilin University, Changchun 130112, China
Judit Oláh: Faculty of Economics and Business, Institute of Applied Informatics and Logistics, University of Debrecen, Debrecen 4032, Hungary

Sustainability, 2019, vol. 11, issue 23, 1-14

Abstract: In modeling the impact of sovereign credit rating (CR) on financial markets, a considerable amount of the literature to date has been devoted to examining the short-term impact of CR on financial markets via an event-study methodology. The argument has been established that financial markets are sensitive to CR announcements, and market reactions to such announcements (both upgrading and degrading) are not the same. Using the framework of an autoregressive distributed lag setting, the present study attempted to empirically test the linear and non-linear impacts of CR on financial market development (FMD) in the European region. Nonlinear specification is capable to capture asymmetries (upgrades and downgrades) in the estimation process, which have not been considered to date in financial market literature. Overall findings identified long-term asymmetries, while there was little evidence supporting the existence of short-term asymmetries. Thus, the present study has extended the financial market literature on the subject of the asymmetrical impact of a sovereign CR on European FMD and provides useful input for policy formation taking into account these nonlinearities. Policies solely based upon linear models may be misleading and detrimental.

Keywords: credit rating; financial market development; Standard and Poor’s; Moody’s; asymmetries (search for similar items in EconPapers)
JEL-codes: Q Q0 Q2 Q3 Q5 Q56 O13 (search for similar items in EconPapers)
Date: 2019
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