SOVEREIGN CREDIT RATING NEWS AND FINANCIAL MARKETS FLUCTUATIONS: EVIDENCE FROM THE EUROPEAN MARKET

Abstract

Since the 2008 financial crisis, credit rating agencies have faced criticism that their ratings led to and exacerbated the financial crisis rather than helping the market have better knowledge of potential risks embedded in the institutions and products and prevent the crisis from happening.

This paper analyzed whether rating news (upgraded or downgraded ratings, positive or negative outlook or watch announcements) from major credit rating agencies, such as Standard & Poor's (S&P), Fitch, and Moody's, enlarged fluctuation in the markets. The research uses a modified Speculative Market Pressure (SMP) index (Kraussl, 2003) as a key measurement for market fluctuation. Credit rating news of 26 European countries from the three major rating agencies was included. An ordinary least squares (OLS) analysis showed that credit rating news provides predictive information on market fluctuation, especially upgraded rating changes, but not downgraded ratings, positive outlook/watch news, or negative outlook/watch news. In addition, this research discusses what regulation policies could be introduced to mitigate abnormal fluctuations, especially in a financial crisis.