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Abstract
Rating agencies have been very active during the economic crisis and have been blamed for damaging the refinancing possibilities of the eurozone countries. Their decisions concerning sovereign bonds have been widely pointed out as one of the reasons why spreads rose dramatically between 2009 and 2012. Nonetheless, last evolutions of the sovereign spreads in countries such as Spain, Ireland or France show that sovereigns do not respond to rating assessments as extremely as they did before. Therefore, economic actors may wonder whether there has been a recent change in the trend or by contrast those assessments did not influence the volatility of the spreads, which may have been motivated by other variables. In this paper we will intend to determine to what extent S&P announcements were drivers of higher volatility of sovereign bonds’ spreads and how these effects (if any) have evolved over the economic crisis.
Highlights
The sustainability of public finances has been widely discussed in the framework of the eurozone crisis
Some of the above mentioned papers study the impact of rating assessments on sovereign bonds yields in the context of the eurozone crisis, none of them analyze the issue from the perspective of spreads volatility
Our main results show that downgradings lead to abnormal volatility before and after the event
Summary
The sustainability of public finances has been widely discussed in the framework of the eurozone crisis. Along with the increase of the spreads, we observe a sharp rise of the volatility experienced by eurozone sovereigns, questioning their consideration as safe investment In this context, rating agencies played a significant role. Some of the above mentioned papers study the impact of rating assessments on sovereign bonds yields in the context of the eurozone crisis, none of them analyze the issue from the perspective of spreads volatility. Our first objective is to conduct an event study in which we analyze the behavior of sovereign bond volatility, first within an event window of 30 days and later within the 4 days surrounding the rating events in order to determine whether abnormal volatility is observed This choice has been motivated by the methodology used by Reisen and von Maltzan (1998), Hand et al (1992) and Bouraoui (2009). To finalize we will draw some conclusions and policy recommendations
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