Cross-border effects of sovereign rating changes on bond yields before and during the Eurozone crisis
|Author:||Mgr. Martin Zachar|
|Year:||2014 - summer|
|Leaders:|| doc. Ing. Ondřej Schneider MPhil., Ph.D.
|Work type:|| Finance, Financial Markets and Banking
|Awards and prizes:|
|Abstract:||This paper looks into the contagion dynamics of sovereign credit rating changes with regards to
bond yields in the period before and during the sovereign debt crisis in Europe. Our sample
included European Union member countries, as well as a Eurozone subsample and a subsample
excluding highly indebted countries. Events and outlooks from all three major rating agencies were
considered. Our findings for the pre-crisis period are consistent with existing research, indicating
an increase in borrowing costs by approximately five basis points in the case of a one-notch
negative event, and insignificant effects in the case of positive events. During the crisis period, we
observed a reversal of this effect, associating negative ratings with lower spreads on the entire
sample. However, the effect was no longer significant when highly indebted countries were
excluded from the sample, indicating that this effect may be tied to overly negative expectations.
Lastly, we investigated the persistence of results, with only full-sample crisis period data
displaying persistent effects.