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Sovereign Credit Ratings, Market Volatility, and Financial Gains

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

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Authors

A. Afonso

P. Gomes



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 29, 2024
Journal Computational Statistics & Data Analysis
Print ISSN 0167-9473
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

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Copyright Statement
NOTICE: this is the author’s version of a work that was accepted for publication in Computational Statistics & Data Analysis. Changes resulting from the publishing process, such as peer review, editing, corrections, structural formatting, and other quality control mechanisms may not be reflected in this document. Changes may have been made to this work since it was submitted for publication. A definitive version was subsequently published in Computational Statistics & Data Analysis, 76, August 2014, 10.1016/j.csda.2013.09.028.




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