Credit Rating Agency Announcements and the Eurozone Sovereign Debt Crisis

Christopher Baum, Margarita Karpava, Dorothea Schäfer and Andreas Stephan

No 1333, Discussion Papers of DIW Berlin from DIW Berlin, German Institute for Economic Research

Abstract: This paper studies the impact of credit rating agency (CRA) 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 G1 G12 G14 G24 (search for similar items in EconPapers)
Pages: 34 p.
Date: 2013
New Economics Papers: this item is included in nep-mac, nep-opm and nep-ore
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Citations: View citations in EconPapers (7)

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Related works:
Working Paper: Credit Rating Agency Announcements and the Eurozone Sovereign Debt Crises (2013)
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Persistent link: https://EconPapers.repec.org/RePEc:diw:diwwpp:dp1333

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