Christopher Baum, Margarita Karpava, Dorothea Schäfer and Andreas Stephan ()
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Christopher Baum: Boston College, DIW Berlin, Postal: The Ratio Institute, P.O. Box 5095, SE-102 42 Stockholm, Sweden
Margarita Karpava: MediaCom London, Postal: The Ratio Institute, P.O. Box 5095, SE-102 42 Stockholm, Sweden
Dorothea Schäfer: JIBS, DIW Berlin, Postal: The Ratio Institute, P.O. Box 5095, SE-102 42 Stockholm, Sweden
Andreas Stephan: Ratio & JIBS, Postal: The Ratio Institute, P.O. Box 5095, SE-102 42 Stockholm, Sweden
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 ignificantly 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
JEL-codes: E42; E43; E44; F31; F42; F65; G01; G12; G14; G24
34 pages, November 4, 2013
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