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The sovereign yield curve and credit ratings in GIIPS
Author(s) -
Riaz Yasir,
Shehzad Choudhry T.,
Umar Zaghum
Publication year - 2021
Publication title -
international review of finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.489
H-Index - 18
eISSN - 1468-2443
pISSN - 1369-412X
DOI - 10.1111/irfi.12306
Subject(s) - sovereign credit , yield curve , credit rating , sovereignty , yield (engineering) , autoregressive model , economics , econometrics , curvature , credit risk , monetary economics , mathematics , interest rate , actuarial science , credit default swap , political science , materials science , geometry , politics , law , metallurgy
This paper studies the impact of sovereign credit rating and outlook changes on the shape of the sovereign yield curve using data for five European countries, namely, Greece, Ireland, Italy, Portugal, and Spain, known as the GIIPS for the period of 2001–2016. We use the dynamic Nelson–Siegel model to estimate the level, slope, and curvature of the yield curve. Subsequently, we employ the vector autoregressive model to estimate the effect of sovereign rating and outlook changes on the sovereign yield curve. We find a significant effect of rating downgrades and an insignificant effect of rating upgrades in all five countries; however, the results for the effect of changes in outlook status are mixed. Our results remain robust to various sensitivity tests.