Sovereign Credit Ratings, Market Volatility, and Financial Gains

Afonso, A.; Gomes, P.; Taamouti, A.

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.

Citation

Afonso, A., Gomes, P., & Taamouti, A. (2014). Sovereign Credit Ratings, Market Volatility, and Financial Gains. Computational Statistics & Data Analysis, 76, 20-33. https://doi.org/10.1016/j.csda.2013.09.028

• Journal Article Type: Article
• Acceptance Date: Sep 26, 2013
• Online Publication Date: Oct 5, 2013
• Publication Date: Aug 1, 2014
• Deposit Date: Aug 28, 2014
• Publicly Available Date: Mar 3, 2015
• Journal: Computational Statistics & Data Analysis
• Print ISSN: 0167-9473
• Electronic ISSN: 1872-7352
• Publisher: Elsevier
• Peer Reviewed: Peer Reviewed
• Volume: 76
• Pages: 20-33
• DOI: https://doi.org/10.1016/j.csda.2013.09.028
• Keywords: Sovereign ratings, Yields, Stock market returns, Volatility, EGARCH, Optimal portfolio, Financial gain, Risk management, Value-at-risk.
• Public URL: https://durham-repository.worktribe.com/output/1446233