CREDIT RATING ANNOUNCEMENTS AND STOCK MARKET RETURNS: THE CASE OF GREECE

Credit rating announcements or rating news may have significant impact on the stock market returns (Azerki et al., 2011; Ferreira and Gama, 2007; Norden and Weber, 2004). The present paper examines the impact of rating news on the Greek General index of the Athens Stock Exchange (ASE) using GARCH-family models under several distributional assumptions (Normal, Student’s-t and GED) for the errors. We focus on the three major credit rating agencies, i.e. Fitch, Moody’s and S&P; our analysis considers announcements over the period 2009-2011. In particular, there are 15 rating announcements for Greece between January 2009 and May 2011, as follows Fitch (5 announcements) – Moody’s (5 announcements) – S&P (5 announcements), all of which are downgrades. Our results show that negative rating news does seem to have an economically and statistically significant (negative) impact on the Greek stock market only at the day of the announcement (event). We find that the dummy coefficients for pre- and after- the credit rating announcements are insignificant, which suggests that rating history does not matter (Ferreira and Gama, 2007); hence, the stock market in Greece understands downgrades as surprises. Further, market participants recognize downgrades as a wake-up call, especially during bad times of Greek economy or financial crises (Ferreira and Gama, 2007). Further research should examine the spillover effects of rating news on International financial markets using a GARCH methodology.