Effects of Sovereign Credit Ratings on the Eurozone Stock Markets During the Recent Financial Crises
Yılmaz BAYAR, Cüneyt KILIÇ, Burcu KILINÇ SAVRUL

Abstract
Investors have increased their investments in sovereign government bonds together with the globalization of economies. The increasing share of government bonds in total debt instruments raised the importance of sovereign credit ratings. Sovereign credit ratings do not affect only government bonds but also have potential to affect ratings of domestic banks or companies, so they may affect financial markets positively or negatively. This study examines the effects of sovereign credit ratings of the Eurozone countries, interest rate decisions of European Central Bank and US dollar/euro exchange rate on the stock markets of Eurozone countries during the recent financial crises from January 2008 to December 2012. Pedroni’s cointegration analysis is used to test whether there is long term relationship among variables in the model, DOLS and FMOLS methods are used to estimate final unbiased coefficients of this relationship and test consistency of estimators and then Holtz-Eakin causality test is used to determine the direction of causality among the variables. We find that there was a long term relationship between stock index and sovereign credit ratings, foreign exchange rate and interest rate variables and the direction of causality was unidirectional from sovereign credit ratings andi nterest rate tostockindexandbidirectionalbetweenforeign exchange rate and stock index. On the other hand in the short term changes in sovereign credit ratings and foreign exchange rate had positive effects on stock market index; interest rate had negative effects on stock index.

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