Sovereign Ratings Changes Impact on Euro Area Bond Yield Spreads.
Sovereign Ratings Changes Impact on Euro Area Bond Yield Spreads.

Summary/Abstract: The paper aim is to identify the impact of sovereign rating changes on Euro Area sovereign yield spreads. The empirical analysis used in this article therefore combines methodology of literature analysis, event study and graphic analysis. The main findings could be summarized as follows: (1) in most cases the downgrade of sovereign rating causes the growing spread between Germany and selected Euro Area members yield; (2) in some cases the downgrade of sovereign rating causes the reverse effect meaning that the credit rating agencies decisions do not lead, but lag the market and could spur financial instability. It can be stated that participants in sovereign bond market should not pay close attention to credit rating agencies actions on sovereign rating, because sovereign rating downgrades and upgrades are often lagging and the sovereign rating downgrades and upgrades do not provide enough new information to the market. The findings have few practical implications and it was demonstrated that credit rating agencies do not play the key role in sovereign bond markets. Also, in this paper there is provided two different approaches to evaluate the impact of sovereign rating downgrade/upgrade on sovereign bond yield spreads.

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