The impact of sovereign rating events on bank stock returns: An empirical analysis for the Eurozone
Abstract
Purpose
This paper aims to investigate the impact of sovereign rating signals on domestic banks’ stock returns in a European context.
Design/methodology/approach
The author uses an event study technique to measure short-term bank stock abnormal returns that result from domestic positive or negative sovereign rating events. Then, test results from the univariate event studies are further scrutinised with the bank- and sovereign-related factors related to cross-sectional variations in abnormal bank returns.
Findings
The univariate results show that positive sovereign rating events do not lead to significant bank stock price reactions, while negative events are associated with negative share price effects on domestic banks. The multivariate regression results for the subsample of negative rating events show that the degrees of contagion effects depend on which credit rating agency issues the signal, on whether the events are preceded by other negative sovereign rating signals, and in some cases on the sovereign’s initial rating level and on the bank’s liquidity ratio, profitability level and size.
Originality/value
The study improves the test procedures used by Caselli et al. (2016) and sheds light on the bank valuation effect induced by massive negative sovereign rating signals during the crisis period. The results highlight the share price effect of sovereign events and address political implications of introducing risk weights for sovereign debts.
Keywords
Acknowledgements
The author would like to thank the guest editor and three anonymous referees for their useful comments that improved the quality of this paper. The author is also grateful to Jörg Prokop and Hans-Michael Trautwein from the Carl von Ossietzky University of Oldenburg for their constructive suggestions on an earlier draft. The remaining errors, if any, are the author’s own.
Citation
Hu, H. (2017), "The impact of sovereign rating events on bank stock returns: An empirical analysis for the Eurozone", Journal of Risk Finance, Vol. 18 No. 4, pp. 338-367. https://doi.org/10.1108/JRF-12-2016-0156
Publisher
:Emerald Publishing Limited
Copyright © 2017, Emerald Publishing Limited