This thesis investigates the impact of sovereign rating actions issued by credit rating agencies (CRAs) upon 69 equity markets around the world. CRAs' actions have attracted widespread interest in recent years and recent studies highlight their potential impact in the financial markets. Equity markets are an integral part of every country's economy. The smooth functioning of the equity market not only results in several financial benefits but it also provides positive signals about the country's economy to the outside world.
Three original questions are addressed in this thesis. First, to what extent do sovereign ratings affect global equity markets? Second, to what extent do sovereign ratings induce spillover effects on regional equity markets? Third, to what extent do sovereign ratings affect global equity market sectors? A rich daily ratings data set from August 1994 to January 2015 from three global CRAs (S&P, Moody's and Fitch) is utilised. Apart from the main research questions, several sub-questions are part of the analysis, such as comparing pre-crisis and crisis periods, developed versus developing countries and different regional sub-samples. Furthermore, the impact of CRAs' rating actions is also considered on the basis of different rating event types including outlook and watch actions.
The findings reveal several interesting features of the different rating event types of CRAs and their impact in different markets and regions. Equity markets show a stronger reaction overall to S&P's both positive and negative rating news. Moody's and Fitch negative rating actions are also influential in certain markets. Generally, negative outlook/watch signals have more information content for equity markets while actual rating changes and positive outlook actions have more serious impact among the positive rating signals. During the global financial crisis period, Moody's positive rating news and S&P's negative rating news are highly influential.
Such a detailed breakdown investigation of the sovereign ratings impact on the stock market can be of interest to most stakeholders including policy makers, investors and CRAs themselves.