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Do Sovereign Re-Ratings Destabilize Equity Markets during Financial Crises? New Evidence from Higher Return Moments

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  • Robert Brooks
  • Robert Faff
  • Sirimon Treepongkaruna
  • Eliza Wu

Abstract

This study investigates the effects of S&P's sovereign re-ratings on the higher moments of equity market returns over recent financial crises. Using a set of intraday stock market index prices and sovereign credit ratings for a sample of 36 countries that experienced sovereign rating changes over the period from 1996 to 2013, we find that the higher moments of stock market returns are significantly more responsive to sovereign re-ratings during financial crises, but the effects on stock markets are not the same across different financial crises. The effects during crises are, however, magnified for large downgrades and those that are associated with a loss of investment grade status. We find that there are asymmetric effects during financial crises in that downgrades are consistently more significant than upgrades in increasing realized volatility and realized kurtosis. Both upgrades and downgrades affect realized skewness in times of crises in the expected direction.

Suggested Citation

  • Robert Brooks & Robert Faff & Sirimon Treepongkaruna & Eliza Wu, 2015. "Do Sovereign Re-Ratings Destabilize Equity Markets during Financial Crises? New Evidence from Higher Return Moments," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 42(5-6), pages 777-799, June.
    • Handle: RePEc:bla:jbfnac:v:42:y:2015:i:5-6:p:777-799
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    File URL: http://hdl.handle.net/10.1111/jbfa.12119
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    2. Sahibzada, Irfan Ullah & Rizwan, Muhammad Suhail & Qureshi, Anum, 2022. "Impact of sovereign credit ratings on systemic risk and the moderating role of regulatory reforms: An international investigation," Journal of Banking & Finance, Elsevier, vol. 145(C).
    3. Cuadros-Solas, Pedro Jesús & Salvador Muñoz, Carlos, 2022. "Disentangling the sources of sovereign rating adjustments: An examination of changes in rating policies following the GFC," Research in International Business and Finance, Elsevier, vol. 59(C).
    4. Sahibzada, Irfan Ullah, 2023. "To what extent do sovereign rating actions affect global equity market sectors?," International Review of Economics & Finance, Elsevier, vol. 84(C), pages 240-261.
    5. repec:aly:journl:201608 is not listed on IDEAS
    6. Schertler, Andrea & Moch, Nils, 2021. "Bank foreign assets, government support and international spillover effects of sovereign rating events on bank stock prices," Journal of Banking & Finance, Elsevier, vol. 130(C).
    7. Abad, Pilar & Alsakka, Rasha & ap Gwilym, Owain, 2018. "The influence of rating levels and rating convergence on the spillover effects of sovereign credit actions," Journal of International Money and Finance, Elsevier, vol. 85(C), pages 40-57.
    8. Luitel, Prabesh & Vanpée, Rosanne, 2018. "How do sovereign credit ratings help to financially develop low-developed countries?," ECMI Papers 13956, Centre for European Policy Studies.
    9. Abad, Pilar & Ferreras, Rodrigo & Robles, M.-Dolores, 2020. "Information opacity and corporate bond returns: The dynamics of split ratings," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 68(C).
    10. Korzeb, Zbigniew & Niedziółka, Paweł & Nistor, Simona, 2023. "Sovereign creditworthiness and bank foreign ownership. An empirical investigation of the European banking sector," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 89(C).

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