Sovereign credit ratings and financial market volatility

Electronic versions


  • Tran Vu

    Research areas

  • PhD, Bangor Business School


This thesis examines the bi-directional relationship between sovereign credit ratings and financial market volatility. Prior literature focuses on one aspect of the relationship which is the impact of credit rating actions on financial assets’ returns, whereas the links between rating actions and market volatility have attracted little attention. Based on a comprehensive dataset of rating events from the three largest credit rating agencies (CRAs) i.e. S&P, Moody’s, and Fitch, this thesis presents unique evidence of (i) inter-relationships between sovereign rating information and equity market volatility dynamics; (ii) heterogeneous effects of sovereign rating actions on equity and foreign exchange market volatilities; (iii) volatility spill-over effects of rating actions. Several methodologies are employed in order to confirm the robustness of the findings, including event study, multivariate regressions, non-parametric tests, Vector Autoregressive models, probit analyses, and Monte Carlo experiments. The findings reveal that certain types of rating news play an important “confirmation role” whereby rating actions can reduce market ex-post volatility and ex-ante uncertainty. Also, there is evidence of differences in rating policies and timeliness across CRAs which provides some explanation for the heterogeneous effects of rating actions. Rating news which incorporates new information, either negative or positive, is associated with elevated ex-ante market uncertainty and ex-post volatility, while additional rating news which is not new to the public can lead to reduced market uncertainty and volatility. The contribution of this thesis is threefold. First, the findings contribute significantly to the debate on the information content of rating news and highlight the importance of multiple ratings in coordinating investors’ heterogeneous beliefs. Second, the thesis provides valuable insights for the debate on the role and regulation of CRAs since the global financial crisis. Third, the findings offer practical implications for option traders, international investors, financial institutions, and portfolio managers.


Original languageEnglish
Awarding Institution
Award dateJan 2015