Spillover Effects of stock markets volatility, and Financial Contagion: Evidence from European sovereign debt crisis

Abstract

This study investigates the impact of sovereign rating announcements on stock market volatility and spillover effects. We focus on the main known fragile European countries of the past few years: Portugal, Spain, Greece, and Italy. We distinguish between two
periods: the pre-euro crisis period (2008-2010) and the crisis period (2010-2012). Our results show that the stock market volatility reacts differently in response to credit rating changes in the two periods. During the sovereign crisis period, we observe
an asymmetric reaction of the domestic stock market volatility in favor of a ratings downgrade. However, in the pre-euro crisis period, we show that stock market volatility reacts to both downgrades and upgrades. Further, the results show a similarity between the two periods concerning the spillover effect occurring only in the case of foreign downgrades.