The Impacts of Sovereign Credit Ratings on Exchange Rates-Evidence from Eurozone Sovereign Debt Crisis

Abstract: This paper examines the impacts of Eurozone sovereign credit rating announcements by three leading rating agencies on exchange rates from January 1, 2009 to March 31, 2011. Firstly we report the mean and volatility of USD/EUR in response to Eurozone sovereign rating news. Secondly, thanks to the high integration in Europe, we extend our analysis to the movement of USD/SEK in order to see how non-Eurozone countries, such as Sweden, are affected by Eurozone sovereign rating news. Furthermore, we exclude the sovereign rating news concerning some small Eurozone countries during this period to observe any different results. We conclude that sovereign rating announcements greatly affect the volatility rather than the mean of USD/EUR. It is noteworthy that markets only react to the news of review concerning large economies and tend to ignore those about small economies. Markets will be adjusted when the real rating actions concerning small economies happen. In addition, Eurozone sovereign rating news only slightly influences the mean of USD/SEK, which implies non-Eurozone countries, such as Sweden, are somewhat indirectly affected by Eurozone sovereign debt crisis.