Sovereign rating actions and the implied volatility of stock index options
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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
| Original language | English |
|---|---|
| Pages (from-to) | 101-113 |
| Journal | International Review of Financial Analysis |
| Volume | 34 |
| DOIs | |
| Publication status | Published - 5 Jun 2014 |
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