Unpacking the impact of CRA’s watch announcement on EUsovereign bond yields: empirical examination ofEx Anteand post ante effects of the CRAII regulation

Abstract

The study aims to analyze whether there is a correlation between credit rating agencies’ (CRAs) watchannouncements on EU sovereign bond yields and EU sovereign bond yields after the implementation of the CRAII Regulation. In theory, the role of rating agencies is to provide key information to investors regarding the riskassociated with investing in sovereign bonds. However, it remains unclear whether CRAs influence EU sovereignbond yields. Sovereign bond yields are collected for Austria, Germany, Belgium, Finland, France, the Netherlands,Ireland, Italy, Spain, and Portugal. These countries’ samples represent the empirical analysis of our study. Dataused for this analysis include information on European sovereign bond yields, credit watch announcements fromStandard & Poor’s Financial Services, Moody’s Investors Service, and Fitch Ratings, and interest rate volatilityare all extrapolated from the Bloomberg database. European sovereign bond yields are collected from 1940to 2015. Our study conducted multiple linear regression tests to determine whether there is evidence that achange in yield is determined by a watch announcement made by the big three credit rating agencies beforeand after the introduction of the CRA II Regulation and hence, whether CRAs do influence yields with their watchannouncements. According to theF-test andp-value results, the study of sovereign bonds with 10 and 5-yearmaturities shows statistical significance in both situations at 95 and 99% confidence levels. With 0 for all regressionanalyses, interest rate volatility is also statistically significant