Do sovereign re-ratings destabilize equity markets during financial crises? New evidence from higher return moments

Robert Darren Brooks, Robert Faff, Sirimon Treepongkaruna, Eliza Wu

Research output: Contribution to journalArticleResearchpeer-review

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.
Original languageEnglish
Pages (from-to)777 - 799
Number of pages23
JournalJournal of Business Finance and Accounting
Volume42
Issue number5-6
DOIs
Publication statusPublished - 2015

Cite this

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title = "Do sovereign re-ratings destabilize equity markets during financial crises? New evidence from higher return moments",
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.",
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Do sovereign re-ratings destabilize equity markets during financial crises? New evidence from higher return moments. / Brooks, Robert Darren; Faff, Robert; Treepongkaruna, Sirimon; Wu, Eliza.

In: Journal of Business Finance and Accounting, Vol. 42, No. 5-6, 2015, p. 777 - 799.

Research output: Contribution to journalArticleResearchpeer-review

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