Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/154087
Authors: 
Afonso, António
Gomes, Pedro
Taamouti, Abderrahim
Year of Publication: 
2014
Series/Report no.: 
ECB Working Paper 1654
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 filtered 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, with sovereign rating announcements creating 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.
Subjects: 
EGARCH
financial gain
optimal portfolio
risk management
sovereign ratings
stock market returns
value-at-risk
volatility
yields
JEL: 
C22
C23
E44
G11
G15
H30
Document Type: 
Working Paper

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