The 12 references with contexts in paper Rabah Arezki, Bertrand Candelon, Amadou Sy (2011) “Sovereign Rating News and Financial Markets Spillovers: Evidence from the European Debt Crisis” / RePEc:ces:ceswps:_3411

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BIS (2010), BIS Quarterly Review, December 2010, Basel, www.bis.org
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    the impact of rating news on credit markets (albeit focusing on CDS markets) but considers more systematically the potential spillover effects that structurally exist within different asset market classes using stock market indices as well as banking and 2 It has been stimulated by the first and second banking directive in 1977 and 1985.
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    BIS (2010)
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    provides figures on cross-border holding across countries. 4 insurance sub-indices. Also, the present paper is, to the extent of our knowledge, the first to focus on the spillover effects of sovereign rating news on mature markets namely Eurozone countries.

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    First, as soon as other countries are downgraded, policy makers should act preventively by communicating effectively to dissipate concerns regarding what 17
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    BIS (2010)
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    documents US banks’ exposure to Euro zone countries. 25 market participants perceive as weaknesses. Second, since spillover effects go beyond sovereign debt markets, policy makers should be prepared to address possible instability in the banking, insurance, and non-financial sector by preparing a contingency plan.

2
Blundell-Wignall, A. and P. Slovik (2010), “The EU Stress Test and Sovereign Debt Exposures”, OECD Working Papers on Finance, Insurance and Private Pensions, No. 4, OECD Financial Affairs Division, www.oecd.org/daf/fin
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    A sovereign rating downgrade in a given country is thus likely to affect the profitability of banks in other countries where banks are holding this debt. This is the case of Europe where banks hold at times substantial amount of sovereign debt in both their trading and banking books (see
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    Blundell-Wignall and Slovik, 2010).
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    Another example of channels through which sovereign rating news may spill over across countries and markets is when banks across countries hold claims on banks in other countries and are thus exposed to one another.

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Dungey, M., Fry, R., Martin V. and B. Gonzalez-Hermosillo, (2004), "Empirical Modeling of Contagion: A Review of Methodologies," IMF Working Papers 04/78, International Monetary Fund.
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    Section 5 presents robustness checks. Section 6 concludes. 3 This is shown to be equivalent to other empirical approach to identify contagion as documented in
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    Dungey et al. (2004).
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    5 II. The European Debt Crisis through the Lens of Credit Rating Agencies We focus on the three major credit rating agencies, i.e. Fitch, Moody’s and Standard and Poor’s (S&P) making announcements of various types, namely rating changes (upgrades and downgrades), revision of outlook (positive and negative) and review for future rating changes.

5
Engle, R.F. and C.W.J. Granger (1987), “Cointegration and Error-Correction: Representation, Estimation, and Testing”, Econometrica, pp. 251-276
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    Using such a specification will also allow us to obtain unbiased estimates of the effect of the rating news on market prices, disentangling the effects of the structural linkages between market (characterized by Φ(L)) and the impact of credit rating news via the matrix b ij ). 7
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    Engle and Granger (1987)
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    showed that considering a VAR in difference while there exists one or more cointegration relationships would result in biases in the estimators. 13 IV. Results The model is first estimated without dummies in order to exhibit the potential linkages between financial markets.8 We then introduce all individual dummies at once in the VAR model using the rating announcements described in Secti

6
Fama, E. (1970), “Efficient Capital Markets: A Review of Theory and Empirical Work.” Journal of Finance, 25, 383-417
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    First, it is assumed that market i is efficient as the return does not depend on past variables. In theory, the efficient market hypothesis implies that there should not be predictable changes in asset prices (see
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    Fama, 1970).
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    The intuition behind such hypothesis is that if everyone believed that the price of a stock would fall tomorrow, they would bid down the price today and the price would thus adjust instantaneously. However, there is a large body of empirical literature providing evidence of departures from market efficiency.

8
Favero, C.A. and Giavazzi, F. (2002), “Is the International Propagation of Financial Shocks Non Linear? Evidence from the ERM,” Journal of International Economics, Vol. 57(1), pp. 231–246.
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    Indeed, previous studies have focused on emerging markets where exchange rate fluctuations render difficult the identification of the effect of credit rating news. To do so, we use a VAR framework inspired from
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    Favero and Giavazzi (2002)
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    using dummies to capture the effect of sovereign rating news on various financial markets across countries. 3 Our approach combines event study techniques with the interdependence literature (see inter alia Favero and Giavazzi, 2002) and allows identifying which markets and countries are affected by any given sovereign rating downgrade.

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    To do so, we use a VAR framework inspired from Favero and Giavazzi (2002) using dummies to capture the effect of sovereign rating news on various financial markets across countries. 3 Our approach combines event study techniques with the interdependence literature (see inter alia
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    Favero and Giavazzi, 2002) and
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    allows identifying which markets and countries are affected by any given sovereign rating downgrade. We are also able to capture the dynamic spillover effect of rating news on different asset classes across countries by controlling for the lagged effects of the fluctuations in those assets.

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    Using model (1’) to evaluate the impact of rating news on financial markets would lead to a bias not only in the scope but also in the magnitude of the estimation. Hence, our event study takes into account the potential linkages between markets. As in
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    Favero and Giavazzi (2002),
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    we consider a Vector Autoregression (VAR) framework. Variables are included in levels to allow for the possibility of long-run/cointegration 6 The impulse dummy is 1 at time t and zero otherwise. 12 relationships. 7 The model we use in the following econometric analysis takes the following form: Z i t = Φ (L) Z i t + v i t (2) where Z i t

10
FSB, 2010, “Principles for reducing reliance on CRA ratings,” 27 October 2010, www.financialstabilityboard.org
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    Third, as financial instability may stem from the existence of ratings-based regulations, policy makers should review the appropriateness of using credit ratings in financial markets regulation. 18 18 The Financial Stability Board
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    (FSB, 2010)
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    presents a number of principles for reducing reliance on credit ratings. 26

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Gande, A. & Parsley, D. C.(2005), "News Spillovers in the Sovereign Debt Market," Journal of Financial Economics, Elsevier, vol. 75(3), pp 691-734, March.
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    rating announcements may spillover to other markets including as a result of rating-based triggers such as those in banking regulation, ECB collateral rules, CDS contracts or investment mandates. In spite of these channels, the literature on the spillover effects of rating news is sparse. Considering sovereign bond spreads data from emerging markets spanning the period 1991 to 2000,
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    Gande and Parsley (2005)
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    find that a country’s rating downgrade has a significant negative effect on the sovereign bond spreads of other countries. In integrated financial markets, however, one should expect rating downgrade to have effects beyond bond markets.

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    It suggests that there is heterogeneity of coefficients associated with the dummies across countries. Such a result highlights the transmission heterogeneity of rating news across European countries, preventing us to use panel data techniques assuming homogeneity across countries as in
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    Gande and Parsley (2005) and Kaminsky and Schmuckler (2002).
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    We therefore conduct our estimation for each individual country separately. B. Interdependence between Markets The model is first estimated without considering any exogenous variables. It corresponds hence to model (2): Z i t = Φ(L) Z i t + v i t.

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Granger, C., Huang, B. and Yang, C. (2000), “Bivariate Causality Between Stock Prices and Exchange Rates in Asian Countries,” The Quarterly Review of Economics and Finance, Vol. 40, pp. 337–54.
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    However, there is a large body of empirical literature providing evidence of departures from market efficiency. Second, such a specification relies on the assumption that financial markets are not interrelated. However, the literature on financial globalization has shown otherwise (see
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    Granger et al (2000)).
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    There are evidence of spillovers between countries and between markets within the same country. Those spillover effects can be of a long-run nature often referred to as “interdependence” and of a short-run nature often referred to as “contagion”.

13
Kaminsky, G. and Schmuckler, S.L. (2002), “Emerging Markets Instability: Do Sovereign Ratings Affect Country Risk and Stock Returns?, World Bank Economic Review, 16:2, pp. 171-195.
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    It suggests that there is heterogeneity of coefficients associated with the dummies across countries. Such a result highlights the transmission heterogeneity of rating news across European countries, preventing us to use panel data techniques assuming homogeneity across countries as in
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    Gande and Parsley (2005) and Kaminsky and Schmuckler (2002).
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    We therefore conduct our estimation for each individual country separately. B. Interdependence between Markets The model is first estimated without considering any exogenous variables. It corresponds hence to model (2): Z i t = Φ(L) Z i t + v i t.

14
Mora, N. (2006), “Sovereign credit ratings: guilty beyond reasonable doubt?”, Journal of Banking and Finance, 30, pp. 2041–2062.
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    This could also suggest that credit rating agencies anticipate that those rating downgrades are temporary and that in the future European countries would recover their pre-crisis grade. 4
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    Mora (2006)
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    among others provides evidence of delayed sovereign rating announcements of credit rating agencies in the context of the Asian crisis. White (2010) provides an excellent overview of the literature on credit rating agencies including on the evidence of their sluggishness in making corporate rating announcements in the US. 9 Figure 2: Positive and Negative Announcements over Time 6 4 2 0 Sept

17
White, L. J. 2010. "Markets: The Credit Rating Agencies." Journal of Economic Perspectives, 24(2): 211–26.
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    This could also suggest that credit rating agencies anticipate that those rating downgrades are temporary and that in the future European countries would recover their pre-crisis grade. 4 Mora (2006) among others provides evidence of delayed sovereign rating announcements of credit rating agencies in the context of the Asian crisis.
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    White (2010)
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    provides an excellent overview of the literature on credit rating agencies including on the evidence of their sluggishness in making corporate rating announcements in the US. 9 Figure 2: Positive and Negative Announcements over Time 6 4 2 0 September-06July-07May-08March-09January-10 -2 -4 -6 -8 C.