Pro-Cyclical Effect of Sovereign Rating Changes on Stock Returns: A Fact or Factoid?

Document Type

Article

Source of Publication

Applied Economics

Publication Date

3-28-2019

Abstract

© 2018, © 2018 Informa UK Limited, trading as Taylor & Francis Group. This article examines the effect of changes in sovereign credit ratings and their outlook on the stock market returns of European countries at different phases of business cycle. Using standard four-factor model, it records a significant average marginal effect of credit rating announcements on stock market returns. Both magnitude and significance of the effect vary with business cycle and across announcement types. However, we do not find evidence of pro-cyclical effect of sovereign rating and outlook changes on stock returns. Our results show that stock markets react more negatively to rating downgrades in recovery phases and more positively to rating upgrades in contractionary period. Both results are statistically significant and robust to various sensitivity tests.

ISSN

0003-6846

Publisher

Routledge

Volume

51

Issue

15

First Page

1588

Last Page

1601

Disciplines

Business

Keywords

asset pricing, business cycle, Sovereign ratings, stock returns

Scopus ID

85054928224

Indexed in Scopus

yes

Open Access

no

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