THE EURO ZONE BOND MARKET

Sovereign Credit Ratings and The euro zone Bond Market

[Name of the Institute]ACKNOWLEDGMENT

I would like to thank everyone who helped me in completing my dissertation on time including my supervisor, my teachers, my family and my friends. Without their kind support this research would not be possible.

DECLARATION

The dissertation submitted is the result of an individual effort and investigation, except where it is stated otherwise. The title of this dissertation and the depth have not been accepted by any degree neither it is being concurrently submitted for other degree.

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Abstract

Credit rating agencies and their role has been in criticism and in discussion ever since their announcement effected the global market situation. They rate the currencies and bonds, stocks and other securities of countries and companies. The ratings affect the global bonds market and stock markets. These securities and stocks also react to the changes like in exchange rates. Therefore, we control this change in this study and analyzed the effect of announcements made by credit rating agencies via studying the euro zone bonds market for this research. We selected five countries from the euro zone and gathered the monthly data on a five years time-period and performed a time-series analysis. Through event study method, the effect of announcement about sovereign credit ratings made by credit rating agencies on the bonds market of Germany, Italy, France, Spain and Portugal has been investigated. The estimation part of the event study method is done by using the Capital Asset Pricing Model. The statistical method used to estimate the parameters is Ordinary Least Square Method. The results showed the significant effect of the announcements made by the credit rating agencies on the bonds market of the euro zone. The downgrades are effective more than the upgrades on the euro zone bonds market. The stickiness of sovereign credit ratings is very supportive for the agencies in making sound impact on the bonds market and market players. The country with government bonds of aggressive nature is less reactive towards the announcements made by credit rating agencies. The significant effect of credit rating agencies on the euro zone bonds market suggest that the countries must look for the ways to improve these ratings as well as the oligopoly of credit rating agencies must be curbed to provide right guidance for the markets and market players.Table of Contents

CHAPTER 1: INTRODUCTION8

1.1 Credit Ratings and Credit Rating Agencies9

1.2 Sovereign Credit Ratings10

1.3 Government Bonds11

1.4 Eurobonds11

1.5 The euro zone Bonds Market11

1.6 Aims and Objective of this Study13

CHAPTER 2: LITERATURE REVIEW15

2.1 Role of Credit Rating Agencies and Bonds Market17

CHAPTER 3: METHODOLOGY22

3.1 Measuring Abnormal Returns22

3.2 Capital Asset Pricing Model (CAPM)22

3.3 Event Study Method23

3.4 Data24

3.5 Estimation Methods24

3.6 Analysis of Variance (ANOVA)25

3.7 Limitations of Event Study Methods25

CHAPTER 4: RESULTS28

4.1 Estimation Window Results28

4.2 Bonds Yield and Sovereign Credit Ratings29

4.3 Effect of Credit Ratings on Government Bonds of Germany31

4.4 Effect of Credit Ratings on Government Bonds of Italy33

4.5 Effect of Credit Ratings on Government Bonds of France34

4.6 Effect of Credit Ratings on Government Bonds of ...