The Impact of Sovereign Credit Rating Surprises on Asset Price Dynamics in Europe

Can sovereign credit rating surprises affect asset prices dynamics ? This paper examines the impact of the unexpected component of sovereign credit rating announcements on sovereign yield spreads and stock market returns of the European Union. We identify the unexpected component of sovereign credit rating announcements and carry out an event study analysis in order to asses their impact on sovereign bond yield spreads and stock market returns. Most notably, we find that the unexpected component of sovereign credit ratings announcements affects sovereign yield spreads and stock market returns. In particular, negative surprises put upward pressure on sovereign bond yield spreads and stock market returns.