Sovereign credit ratings, market volatility, and financial gains Articles uri icon

authors

  • ALFONSO, ANTONIO
  • BATISTA MAIA GOMES, PEDRO
  • TAAMOUTI, ABDERRAHIM

publication date

  • August 2014

start page

  • 20

end page

  • 33

volume

  • 76

International Standard Serial Number (ISSN)

  • 0167-9473

Electronic International Standard Serial Number (EISSN)

  • 1872-7352

abstract

  • The reaction of EU bond and equity market volatilities to sovereign rating announcements (Standard & Poor's, Moody's, and Fitch) is investigated using a panel of daily stock market and sovereign bond returns. The parametric volatilities are defined using EGARCH specifications. The estimation results show that upgrades do not have significant effects on volatility, but downgrades increase stock and bond market volatility. Contagion is present, and sovereign rating announcements create interdependence among European financial markets with upgrades (downgrades) in one country leading to a decrease (increase) in volatility in other countries. The empirical results show also a financial gain and risk (value-at-risk) reduction for portfolio returns when taking into account sovereign credit ratings' information for volatility modelling, with financial gains decreasing with higher risk aversion. (C) 2013 Elsevier B.V. All rights reserved.

keywords

  • sovereign ratings; yields; stock market returns; volatility; egarch; optimal portfolio; financial gain; risk management; value-at-risk; conditional heteroskedasticity; stock markets; default swap; spillovers; news; announcements; linkages; returns; models