Unpacking the Impact of CRAsWatch Announcement on EU Sovereign Bond Yields: Empirical Examination of Ex Ante and Post Ante Effects of the CRAII Regulation

The paper aims to analyze whether if, there is a correlation relationship between Credit Rating Agencies’ (CRAs) watch announcements on EU sovereign bond yields and EU sovereign bond yields after the implementation of CRA II regulation. In theory, the role of rating agencies is to provide key information to investors regarding the risk associated with in investing in sovereign bonds. . . However, it remains unclear whether CRAs influence EU sovereign bond yields. Sovereign bond yields are collected for Austria, Germany, Belgium, Finland, France, the Netherlands, Ireland, Italy, Spain and Portugal. This country sample represents the empirical analysis of our study. Data used for this analysis includes information on European sovereign bond yields, credit watch announcements from Standard & Poor’s Financial Services, Moody’s Investors Service and Fitch Ratings and interest rate volatility are all extrapolated from Bloomberg Database. European sovereign bond yields are collected from 1940 until 2015. Our study conducted multiple linear regressions tests in order to determine if evidence exists whether there a change in yield is determined by a watch announcement made by the big three credit rating agencies before and after the introduction of the CRA II Regulation and hence, whether CRAs do influence yields with their watch announcements. According to the F-test and p-value results, the study of sovereign bonds with ten and five-year maturities shows statistical significance in both situations at a 95% and 99% confidence level.With 0 for all regression analyses, interest rate volatility is also statistically significant.