Effects of Changes in Sovereign Credit Ratings on Investors’ Behavior

In: Business and Management

Submitted By thollaar
Words 21349
Pages 86
| Effects of changes in sovereign credit ratings on investors’ behavior | | | | |

University: University Utrecht, the Netherlands
Author: A.D. Hollaar
Project-Coordinator: J.H.J.Lukkezen
Course-Coordinator: dr. C. Remery
Course: Applied Economics Research Course
Date: 13th of November, 2011

University: University Utrecht, the Netherlands
Author: A.D. Hollaar
Project-Coordinator: J.H.J.Lukkezen
Course-Coordinator: dr. C. Remery
Course: Applied Economics Research Course
Date: 13th of November, 2011

Table of Contents Abstract 2 Introduction 3 Section I: Theory 5 1.1 Sovereign bonds and credit rating agencies 5 1.2 Measures for investors behavior 6 1.3 Expected behavior of investors 11 1.4 Related literature 15 1.5 Models 16 Section II: Data & Stylized facts 17 2.1 Data 17 2.2 Stylized facts 20 Section III: Empirical analyses 26 3.1 Effect of rating events on investors’ behavior 27 3.2 Effect of business cycles on investors’ behavior surrounding rating events 33 Conclusion 46 Reference list 48 Appendix 52 Section I: Rating symbols & definitions 52 Section II: Tables 54 Section III: Figures 56 Section IV: Extended theory 57 Section V: Graphs 59 Section VI: Data 67 Section VII: Testing classical assumptions 71

Abstract
Firstly, this paper investigates if investors react to changes in sovereign credit ratings. Hereby rating changes for European, Non-European and European Union countries are considered for the period: 1990-2011. Using both bond spreads and credit default swap (CDS) spreads as measures for investors’ behavior, analysis shows that changes in sovereign credit ratings significantly affect these spreads. Furthermore evidence is found that a rating downgrade of a sovereign country has a bigger impact on the spreads than a rating upgrade. Secondly, it is theoretically…...

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