Financial Markets

with Zeynep O. Kurter and Rubens Morita

We investigate the lead-lag relationship between weekly sovereign bond yield changes and stock market returns for eight European countries, and how it changed during the period 2008-2022. We use a Markov-Switching Granger Causality method that determines reversals of causality endogenously. In all countries, there were often changes in the direction of the Granger causality between the two markets that coincided with global and idiosyncratic economic events. Stock returns led changes of sovereign bond yields in most countries, particularly during the nancial, the Euro Area crisis and Covid Pandemic. In contrast with the literature, we nd evidence that changes of sovereign bond yields led stock returns in several periods.

JEL Classification: C32; C54; C61; G01; G12; G15.

Keywords: Sovereign Bond Yields, Stock Markets, Vector Autoregression, Markov-Switching, Granger Causality.

Working paper, 2023


"In search of the determinants of international asset market comovements", 

International Review of Economics and Finance

With Abderrahim Taamouti

We show, in a broad class of affine general equilibrium models with long-run risk, that the covariances between asset returns are linear functions of risk factors. We use a dynamic conditional correlation model to measure the covariances of stock and sovereign bond markets in the Euro Area. We use a new approach to measure risk factors based on Google search data. The factors explain 50 to 60 percent of the variation of the covariances between European stocks and 25 to 35 percent of the covariances between European bonds. The information improves the portfolio performance compared to an equally weighted portfolio.

JEL Classification: C22, G12, G15, G17, E44.

Keywords: Stock and bond comovements; affine general equilibrium models; Eurozone crisis; Google Trends; portfolio weights modeling.

Published, 2016

Stata Codes

"Sovereign credit ratings, market volatility, and financial gains", 

Computational Statistics & Data Analysis

With António Afonso and Abderrahim Taamouti

The reaction of EU bond and equity market volatilities to sovereign rating announcements (Standard & Poor's, Moody's, and Fitch) is investigated using a panel of daily stock market and sovereign bond returns. The parametric volatilities are filtered using EGARCH specifications. The estimation results show that upgrades do not have significant effects on volatility, but downgrades increase stock and bond market volatility. Contagion is present, with sovereign rating announcements creating interdependence among European financial markets with upgrades (downgrades) in one country leading to a decrease (increase) in volatility in other countries. The empirical results show also a financial gain and risk (value-at-risk) reduction for portfolio returns when taking into account sovereign credit ratings’ information for volatility modelling, with financial gains decreasing with higher risk aversion.

Keywords: Sovereign ratings; yields; stock market returns; volatility; EGARCH; optimal portfolio; financial gain; risk management; value-at-risk..

With António Afonso and Davide Furceri

We use EU sovereign bond yield and CDS spreads daily data to carry out an event study analysis on the reaction of government yield spreads before and after announcements from rating agencies (Standard & Poor's, Moody's, Fitch). Our results show significant responses of government bond yield spreads to changes in rating notations and outlook, particularly in the case of negative announcements. Announcements are not anticipated at 1-2 months horizon but there is bi-directional causality between ratings and spreads within 1-2 weeks; spillover effects especially among EMU countries and from lower rated countries to higher rated countries; and persistence effects for recently downgraded countries.

JEL CODEL: C23; E44; G15.

Keywords: credit ratings; sovereign yields; rating agencies.