Credit ratings and stock markets: an event-study approach

Abstract

The impact of sovereign credit downgrades on financial markets was deeply scrutinized on the aftermath of the 2008 financial crisis, especially in Southern Europe. The purpose of this thesis is to analyze the impact of sovereign credit rating downgrades both on National and Foreign stock markets through an Event-Study methodology. The main focus is the impact generated by S&P and Moody’s downgrades on market indexes from advanced economies throughout the world. This approach was taken to compare the impact felt by the downgraded countries with the impact on other countries belonging to that same region. Even though I find little evidence of national impact outside Europe, where the abnormal returns range from - 0,03% to -0,2% on the event date, my analysis suggests that there is evidence of spillover effects throughout the developed world, as one of the models used finds significant negative abnormal returns on the event date in 2 out of the 3 estimation windows considered, the third being marginally insignificant. Regardless of the model the spillover creates abnormal returns that go from 0% to -0,4%.