THE IMPACT OF SOVEREIGN CREDIT RATING CHANGES ON THE STOCK MARKETS IN CENTRAL AND EASTERN EUROPE

This paper examines the price impact of sovereign credit rating change for one Central and Eastern European (CEE) country on the stock exchanges of other CEE countries. The sample includes eight CEE countries, which joined the European Union in May 2004. Data covers the period from May 2004 to March 2010. Sovereign credit rating announcements from three major credit rating agencies (Moody's, S&P, and Fitch) are examined. Event study methodology is employed to estimate the price reaction on the announcement day. Results indicate that both downgrades and upgrades of one CEE country have an economically significant price impact on the stock markets of other CEE countries. The effect is country-dependent, and regional effects seem to exist, particularly with respect to Baltic countries.