DOI: 10.36347/sjebm.2014.v01i06.008

Pages: 263-270

Abstract: Sovereign credit rating not only affects the stock markets of rated countries, but also has spillover effects across countries and markets and in a highly integrated economic entity, spillover effects are more significant. During European debt crisis, the big three rating agencies frequently downgraded some European country ratings, which exacerbated the turmoil of stock markets in these countries, and even caused fluctuations in the entire European stock markets through spillover effects. To observe the impacts of downgrades to PIIGS countries on European stock markets, this paper adopts the method of impulse response function and variance decomposition based on VAR model. The empirical results show that downgrades to each country affect major European stock index differently, which is related to the formation and coverage of each stock index. What’s more, downgrades usually cause the rising of stock markets during European debt crisis, which indicates that there is a "seesaw" effect between stock markets and bond markets and it means funds flow from bond markets to stock markets, reflecting the volatility of European stock markets.