Do Sovereign Re-Ratings Destabilize Equity Markets during Financial Crises? New Evidence from Higher Return Moments

R. Brooks, R. Faff, Sirimon Treepongkaruna, E. Wu

Research output: Contribution to journalArticle

4 Citations (Scopus)

Abstract

© 2015 John Wiley & Sons Ltd. This study investigates the effects of S&P's sovereign re-ratings on the higher moments of equity market returns over recent financial crises. Using a set of intraday stock market index prices and sovereign credit ratings for a sample of 36 countries that experienced sovereign rating changes over the period from 1996 to 2013, we find that the higher moments of stock market returns are significantly more responsive to sovereign re-ratings during financial crises, but the effects on stock markets are not the same across different financial crises. The effects during crises are, however, magnified for large downgrades and those that are associated with a loss of investment grade status. We find that there are asymmetric effects during financial crises in that downgrades are consistently more significant than upgrades in increasing realized volatility and realized kurtosis. Both upgrades and downgrades affect realized skewness in times of crises in the expected direction.
Original languageEnglish
Pages (from-to)777-799
JournalJournal of Business Finance & Accounting
Volume42
Issue number5-6
DOIs
Publication statusPublished - 12 Jun 2015

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