The Effect of a Sovereign Credit Rating Change on Share Prices of the South African Retail Banks

Abstract

The increasing role of credit rating agencies in emerging markets and the various impacts that these rating agencies have on emerging market economies have become of great interest in modern finance. Recent empirical evidence suggests that credit rating downgrades have the potential to disrupt economies. To minimise and control such disruption, it is essential to establish what exactly these disruptions entitles. This study aims to determine whether a South African sovereign credit rating downgrade caused abnormal returns in the shares of local retail banks. Furthermore, the study sets out to determine whether A South African sovereign credit rating downgrade resulted in significant volatility spillover on the shares of South African retail banks. An event study analysis will be implemented to determine whether a downgrade caused abnormal returns, and the presence of volatility spillovers will be determined by means of a GARCH-BEKK model. The main findings indicates that a South African sovereign credit downgrade did result in negative cumulated abnormal returns, and that a change in the South African sovereign credit rating did cause volatility in the shares of South African retail banks. These share price effects can have various implications, such as spillovers to other parts of the equity market, as well as negative spillovers to the real economy. In order to mitigate the potential implications of a South African sovereign credit rating change through the South African retail banking sector, the effects of such a change must first be determined, making this an important study to conduct.