On the Asymmetries of Sovereign Credit Rating Announcements and Financial Market Development in the European Region

In modeling the impact of sovereign credit rating (CR) on financial markets, a considerable amount of the literature to date has been devoted to examining the short-term impact of CR on financial markets via an event-study methodology. The argument has been established that financial markets are sen...

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Bibliographic Details
Published in:Sustainability 2019-12, Vol.11 (23), p.6636
Main Authors: Li, Chunling, Pervaiz, Khansa, Asif Khan, Muhammad, Ur Rehman, Faheem, Oláh, Judit
Format: Article
Language:English
Subjects:
Asymmetry
Bond markets
Bond ratings
Capital markets
Credit ratings
Credit risk
Economic crisis
International finance
Investments
Nonlinearity
Political risk
Ratings & rankings
Securities markets
Stock exchanges
Sustainability
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Summary:In modeling the impact of sovereign credit rating (CR) on financial markets, a considerable amount of the literature to date has been devoted to examining the short-term impact of CR on financial markets via an event-study methodology. The argument has been established that financial markets are sensitive to CR announcements, and market reactions to such announcements (both upgrading and degrading) are not the same. Using the framework of an autoregressive distributed lag setting, the present study attempted to empirically test the linear and non-linear impacts of CR on financial market development (FMD) in the European region. Nonlinear specification is capable to capture asymmetries (upgrades and downgrades) in the estimation process, which have not been considered to date in financial market literature. Overall findings identified long-term asymmetries, while there was little evidence supporting the existence of short-term asymmetries. Thus, the present study has extended the financial market literature on the subject of the asymmetrical impact of a sovereign CR on European FMD and provides useful input for policy formation taking into account these nonlinearities. Policies solely based upon linear models may be misleading and detrimental.
ISSN:2071-1050
2071-1050
DOI:10.3390/su11236636