Transnational Spillover Effects of Sovereign Rating Signals on Bank Stock Returns: Evidence from the Euro Area

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Using a comprehensive sample of listed Eurozone banks we conduct an event study to investigate whether and how sovereign rating events affect foreign financial institutions’ stock prices. We find that negative sovereign rating signals are associated with positive cross-country spillover effects before the European sovereign debt crisis and with negative spillover effects after October 2009. Moreover, positive sovereign rating signals issued by Moody’s or Fitch seem to induce negative cross-country spillover effects in the pre-crisis period, but have no significant effect during the crisis. Finally, we identify differences with respect to the factors driving abnormal returns conditional on which credit rating agency issues the rating signal, and on whether the respective signal is positive or negative.

Author(s):

Haoshen Hu    
University of Oldenburg
Germany

Jörg Prokop    
University of Oldenburg
Germany

Hans-Michael Trautwein    
University of Oldenburg
Germany