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

Nicoletta Rosati, Mario Bellia, Pedro Verga Matos () and Vasco Oliviera ()
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Pedro Verga Matos: University of Lisbon,
Vasco Oliviera: University of Lisbon,

No 2019-08, Working Papers from Joint Research Centre, European Commission (Ispra site)

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)
Pages: 37 pages
Date: 2019-09
New Economics Papers: this item is included in nep-cfn, nep-eec, nep-fmk, nep-mac and nep-sea
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Published by Publications office of the European Union, 2019

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Journal Article: Ratings matter: Announcements in times of crisis and the dynamics of stock markets (2020) Downloads
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