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Credit Rating Agency Downgrades and the Eurozone Sovereign Debt Crises

Christopher Baum, Dorothea Schäfer and Andreas Stephan

No 841, Boston College Working Papers in Economics from Boston College Department of Economics

Abstract: This paper studies the impact of credit rating agency (CRA) downgrade announcements on the value of the Euro and the yields of French, Italian, German and Spanish long-term sovereign bonds during the culmination of the Eurozone debt crisis in 2011-2012. The employed GARCH models show that CRA downgrade announcements negatively affected the value of the Euro currency and also increased its volatility. Downgrading increased the yields of French, Italian and Spanish bonds but lowered the German bond's yields, although Germany's rating status was never touched by CRA. There is no evidence for Granger causality from bond yields to rating announcements. We infer from these findings that CRA announcements significantly influenced crisis-time capital allocation in the Eurozone. Their downgradings caused investors to rebalance their portfolios across member countries, out of ailing states' debt into more stable borrowers' securities.

Keywords: Credit Rating Agencies; Euro Crisis; Sovereign Debt; Euro Exchange Rate (search for similar items in EconPapers)
JEL-codes: E42 E43 E44 F31 F42 F65 G01 G12 G14 G24 (search for similar items in EconPapers)
Date: 2013-11-01, Revised 2014-01-30
New Economics Papers: this item is included in nep-cba, nep-eec, nep-fmk and nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (6)

Published, Journal of Financial Stability, 2016, 24, 117-131

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Related works:
Journal Article: Credit rating agency downgrades and the Eurozone sovereign debt crises (2016) Downloads
Working Paper: Credit Rating Agency Downgrades and the Eurozone Sovereign Debt Crises (2014) Downloads
Working Paper: Credit rating agency downgrades and the Eurozone sovereign debt crises (2014) Downloads
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