Do sovereign rating announcements have an impact on regional stock market co-movements? The case of Central and Eastern Europe

Abstract

This study investigates whether sovereign credit rating, outlook and watch announcements (from Fitch, Moody’s and Standard & Poor’s) for eleven emerging countries, namely Poland, Czech Republic, Hungary, Slovakia, Croatia, Lithuania, Latvia, Estonia, Romania, Bulgaria and Turkey, have a significant effect on the pair-wise correlations between stock market returns. Daily closing prices of the benchmark stock market indices of the aforementioned countries are considered from the end of October 2000 to the end of May 2015. After detrending the global factors from return series, the pair-wise time varying correlations are obtained by consistent Dynamic Conditional Correlation (cDCC) modeling, which is a class of Multivariate GARCH models. In contrast to the previous literature, our analysis reveals that most of the rating related announcements do not have a significant effect on the pair-wise correlations. In a limited number of cases, rating change announcements from Moody’s are more effective than those of the others. The results provide important implications for investors and policymakers.