Transnational spillover effects of European sovereign rating signals on bank stock returns

Abstract

We conduct an event study to investigate how sovereign credit rating events in European countries affect other countries’ bank stock returns. Based on a comprehensive set of 297 exchange-traded European banks, we examine whether cross-country sovereign-to-bank spillover effects exist within the European Union, and whether the impact of sovereign rating signals on foreign bank stock prices has changed after the European sovereign debt crisis. Our results confirm the existence of cross-country spillover effects from sovereign ratings to foreign bank equity returns within the European Union. Moreover, we document a shift in the relationship between foreign sovereign rating changes and abnormal returns after the outbreak of the sovereign debt crisis. Finally, we find that if banks’ exposures to foreign sovereign debt from the GIIPS countries are high, spillover effects associated with rating signals from these countries are significantly stronger.