Global Advanced Research Journal of Management and Business Studies (ISSN: 2315-5086) December 2016 Vol. 5(10), pp 332-338

Copyright © 2016 Global Advanced Research Journals   

Original Research Articles

Sovereign Credit Rating Changes and its Impact on Financial markets of Europe during debt Crisis Period (Greece, Ireland, Portugal, Spain & Italy)

Omar Masood¹ and Kiran Javeria²

¹Director, Quaid-i-Azam School of Management Sciences, Quaid-i-Azam University,Islamabad, 45320, Pakistan, Email: omasood@qau.edu.pk

²Quaid-i-Azam School of Management Sciences, Quaid-I-Azam University, Islamabad

Accepted 11 December 2016

Abstract 

The purpose of this study is to examine the impact of sovereign credit rating changes on financial markets using database of five countries (Greece, Ireland, Portugal, Spain and Italy) covering the major regions in the European union over the period March,2008- Dec, 2015. In general researcher examines sovereign rating impact in stock and bond markets during Euro-zone debt crisis period. First to check the impact of sovereign rating on stock markets returns and researcher also investigate the correlation between credit rating and stock markets returns of each country during the crisis period. Second to check the influence of sovereign credit rating on bond market yield and researcher also examine the correlation between sovereign credit rating & bond market yield of each country during crisis period. For better result three moderating variable inflation, GDP real index and current account to GDP% which are considered as determinants of sovereign credit rating as a moderating variable in the research .Quarterly basis data of all variables is used in the research. By using regression analysis with Durbin Watson test and Pearson correlation for each country financial markets the findings indicated that sovereign credit rating has a significant impact on stock markets of all countries except Portugal. The findings regarding stock markets also states that there is positive correlation among sovereign credit rating and stock markets returns. Stock markets shows negative return in case of rating downgrades. In bond market ten year bond yield reaction is examined due to sovereign rating announcements. The finding shows that regression models are more significant in all countries in case of bond markets. The finding summarized that credit rating has a major influence on financial markets during crisis period. This study is useful for investors, policy maker and Govt. to rebalance their portfolios across member countries and provide reliable picture of financial markets in distress period. The Study is also beneficial for all regulatory bodies like Basel Committee who mostly depend upon Sovereign Credit ratings for their regulatory regimes.

Keywords: Sovereign credit rating, Stock markets, Bond yield, Euro-zone debt crisis, Inflation, GDP real index and Current amount of GDP%