TY - JOUR

T1 - Sovereign rating actions and the implied volatility of stock index options

AU - Tran, Vu

AU - Alsakka, R.

AU - ap Gwilym, O.M.

PY - 2014/6/5

Y1 - 2014/6/5

N2 - This paper examines the interaction between the equity index option market and sovereign credit ratings. SandP and Moody's signals exhibit strong impact on option-implied volatility while Fitch's influence is less significant. Moody's downgrades reduce the market uncertainty over the rated countries' equity markets. Strong causal relationships are found between movements in the option-implied volatility and all credit signals released by SandP and Fitch, but only actual rating changes by Moody's, implying differences in rating agencies' policies. The presence of additional ratings tends to reducemarket uncertainty. The findings highlight the importance of rating information in the price discovery process and offer policy implications

AB - This paper examines the interaction between the equity index option market and sovereign credit ratings. SandP and Moody's signals exhibit strong impact on option-implied volatility while Fitch's influence is less significant. Moody's downgrades reduce the market uncertainty over the rated countries' equity markets. Strong causal relationships are found between movements in the option-implied volatility and all credit signals released by SandP and Fitch, but only actual rating changes by Moody's, implying differences in rating agencies' policies. The presence of additional ratings tends to reducemarket uncertainty. The findings highlight the importance of rating information in the price discovery process and offer policy implications

U2 - 10.1016/j.irfa.2014.05.010

DO - 10.1016/j.irfa.2014.05.010

M3 - Article

VL - 34

SP - 101

EP - 113

JO - International Review of Financial Analysis

JF - International Review of Financial Analysis

SN - 1057-5219

ER -