Modelling sovereign ratings impacts on stock return distributions within a multivariate regime switching long memory framework

Publisher:
University of NSW
Publication Type:
Conference Proceeding
Citation:
Proceedings of the 25th Australasian Finance and Banking Conference 2012, 2012, pp. 1 - 43
Issue Date:
2012-01
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We develop a framework that allows a multivariate system of long memory processes to be conditional on specific regimes. We illustrate our model by investigating the effects of overall European Union (EU) sovereign creditworthiness assessments on the EU stock return distributions via their first four realized moments. We find dissimilar effects of sovereign rating actions across regimes, implying the usefulness of our proposed model in accommodating both long memory and regime switching features. Further, we note that the total effects, including both direct and indirect forces, of the sovereign credit quality assessments on the realized moments can be different to their direct effects. Hence, we develop a tool, which can capture these total effects, to investigate which agency has the greatest impact on the EU stock return distributions. We find that the rank orders of agencies are not unique across regimes and even in each realized moment. Keywords: Intraday data, higher moments, Markov regime switching, long memory, sovereign credit rating, credit rating agency.
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