Advanced

The role of credit rating agencies in the European sovereign debt crisis

Bogdan, Corina LU (2017) NEKP03 20162
Department of Economics
Abstract
Credit rating agencies have been strongly criticized for the failure of accurately rating financial instruments and products. The European sovereign debt crisis has only precipitated the discussions around the role of credit rating agencies in the financial world and their impact on financial markets. The scope of this paper is to identify bond yield spreads reaction towards sovereign credit ratings and find evidence of spillover effects from countries that experienced severe rating changes towards mature EU economies. The analyzed dataset covers sovereign rating announcements released by the three leading rating agencies (Fitch, Moody’s, and Standard & Poor’s), both actual ratings and outlook reviews, and daily bond yield observations for... (More)
Credit rating agencies have been strongly criticized for the failure of accurately rating financial instruments and products. The European sovereign debt crisis has only precipitated the discussions around the role of credit rating agencies in the financial world and their impact on financial markets. The scope of this paper is to identify bond yield spreads reaction towards sovereign credit ratings and find evidence of spillover effects from countries that experienced severe rating changes towards mature EU economies. The analyzed dataset covers sovereign rating announcements released by the three leading rating agencies (Fitch, Moody’s, and Standard & Poor’s), both actual ratings and outlook reviews, and daily bond yield observations for nine European countries from January 1, 2009 to August 31, 2016. The results report that negative rating events increase significantly bond yield spreads, whereas positive rating events trigger no significant impact. Furthermore, the results demonstrate significant existence of spillover effects in case of negative rating events. Precisely, one notch downgrade in event countries trigger a decrease in spreads of one mature EU economy – the Netherlands. The latter finding can be explained by the fact that investors chose to rebalance their portfolio during times of crises from downgraded countries towards more stable economies, hence reducing their interest rates on bonds. (Less)
Please use this url to cite or link to this publication:
author
Bogdan, Corina LU
supervisor
organization
course
NEKP03 20162
year
type
H2 - Master's Degree (Two Years)
subject
keywords
sovereign ratings, spillover effects, European sovereign debt crisis, credit rating agencies, bond yield spreads
language
English
id
8899875
date added to LUP
2017-01-27 14:16:45
date last changed
2017-01-27 14:16:45
@misc{8899875,
  abstract     = {Credit rating agencies have been strongly criticized for the failure of accurately rating financial instruments and products. The European sovereign debt crisis has only precipitated the discussions around the role of credit rating agencies in the financial world and their impact on financial markets. The scope of this paper is to identify bond yield spreads reaction towards sovereign credit ratings and find evidence of spillover effects from countries that experienced severe rating changes towards mature EU economies. The analyzed dataset covers sovereign rating announcements released by the three leading rating agencies (Fitch, Moody’s, and Standard & Poor’s), both actual ratings and outlook reviews, and daily bond yield observations for nine European countries from January 1, 2009 to August 31, 2016. The results report that negative rating events increase significantly bond yield spreads, whereas positive rating events trigger no significant impact. Furthermore, the results demonstrate significant existence of spillover effects in case of negative rating events. Precisely, one notch downgrade in event countries trigger a decrease in spreads of one mature EU economy – the Netherlands. The latter finding can be explained by the fact that investors chose to rebalance their portfolio during times of crises from downgraded countries towards more stable economies, hence reducing their interest rates on bonds.},
  author       = {Bogdan, Corina},
  keyword      = {sovereign ratings,spillover effects,European sovereign debt crisis,credit rating agencies,bond yield spreads},
  language     = {eng},
  note         = {Student Paper},
  title        = {The role of credit rating agencies in the European sovereign debt crisis},
  year         = {2017},
}