Search results for "Sovereign credit"
showing 9 items of 9 documents
The relationship between credit ratings and asset liquidity: Evidence from Western European banks
2020
This study examines the role of asset liquidity in Western European banks’ credit rating downgrades and upgrades over the 2005–2017 period. The results suggest that changes in bank credit ratings have been more favorable for banks that have a liquid asset portfolio. Furthermore, asset liquidity has a stronger effect on the credit rating of banks that already have an illiquid asset portfolio. In contrast, the effect is significantly smaller or nonexistent for the most liquid banks. These results imply that the new liquidity regulation introduced by the Basel III requirements will improve the stability and hence decrease the fragility of the European banking sector. Furthermore, the benefits …
Do sovereign ratings cause instability in cross-border emerging CDS markets?
2020
We analyse the cross-border transmission effect of credit ratings on sovereign CDSs covering a broad sample of emerging countries during the period 2004 to 2015. This study differentiates between the spillover and competition effects between and within geographical areas of emerging countries. We find substantial evidence of cross-border effects with asymmetric responses to upgrades and downgrades. The market reaction differs across regions, reflecting how the international and local impact of rating events are due to different types of effects. At the international portfolio level, the competitive effect is dominant over the spillover effect. Negative events in Asia benefit Africa (which i…
Potential spillovers from the banking sector to sovereign credit ratings
2020
The global financial crisis and European sovereign debt crisis underlined the links between the banking sector and sovereign risk. This paper uses a machine learning technique (random forest regres...
The Effect of Credit Rating Events on the Emerging CDS Market
2017
We document the cross-border spillover impact of S&P sovereign credit rating events on sovereign CDS using an extensive sample of emerging economies. First, we find on average a competition (imitation) effect of downgrades (upgrades) among emerging portfolios. Results confirms that non-event portfolios responds positively to credit deteriorations in terms of an improvement in sovereign credit risk. Second, the sovereign credit risk of non-event countries within the same portfolio benefit (suffer) from downgrades (upgrades). As expected, this implies a competition effect in terms of sovereign credit risk. Moreover, we find that downgrades are more likely to spill over into other emerging mar…
Sovereign Credit Ratings and Financial Markets Linkages: Application to European Data
2012
We use EU sovereign bond yield and CDS spreads daily data to carry out an event study analysis on the reaction of government yield spreads before and after announcements from rating agencies (Standard & Poor’s, Moody’s, Fitch). Our results show significant responses of government bond yield spreads to changes in rating notations and outlook, particularly in the case of negative announcements. Announcements are not anticipated at 1–2 months horizon but there is bi-directional causality between ratings and spreads within 1–2 weeks; spillover effects especially among EMU countries and from lower rated countries to higher rated countries; and persistence effects for recently downgraded countrie…
Portfolio diversification in the sovereign credit swap markets
2018
We develop models for portfolio diversification in the sovereign credit default swaps (CDS) markets and show that, despite literature findings that sovereign CDS spreads are affected by global factors, there is sufficient idiosyncratic risk to be diversified. However, we identify regime switching in the times series of CDS spreads and spread returns, and the optimal diversified strategies can be regime dependent. The developed models trade off the CVaR risk measure against expected return, consistently with the statistical properties of spreads. We consider three investment strategies suited for different CDS market participants: for investors with long positions, speculators that hold unco…
How credit ratings affect sovereign credit risk: cross-border evidence in Latin American emerging markets
2017
This article builds upon previous literature by providing a better understanding of how contagion changes in bordering sovereign CDS emerging markets resulting from credit rating events. To that end, we follow the novel GVAR methodology using data from six Latin American emerging countries during an extensive sample period from 2004 to 2014. Our findings show evidence for the existence of significant and asymmetric cross-border effects. In particular, a competition effect is observed before the event occurs, indicating that non-event countries suffer (benefit) from upgrades (downgrades) in Brazil, Mexico and Chile (in Argentina and Brazil). In contrast, an imitation effect is observed after…
Is There a Credit Risk Anomaly in FX Markets?
2015
This paper explores whether a link between sovereign credit ratings and currency returns exists. Perhaps contrary to expectations, it finds that currencies of countries with higher credit risk tend to generate lower returns than those with a lower credit risk. The credit risk spread cannot be explained by standard risk factors.
Is There a Connection between Sovereign CDS Spreads and the Stock Market? Evidence for European and US Returns and Volatilities
2020
This study complements the current literature, providing a thorough investigation of the lead&ndash