Sovereign rating actions and the implied volatility of stock index options

This paper examines the interaction between the equity index option market and sovereign credit ratings. S&P and Moody’s signals exhibit strong impact on option-implied volatility while Fitch’s influence is less significant. Moody’s downgrades reduce the market uncertainty over the rated countries’ equity markets. Strong causal relationships are found between movements in the option-implied volatility and all credit signals released by S&P and Fitch, but only actual rating changes by Moody’s, implying differences in rating agencies’ policies. The presence of additional ratings tends to reduce market uncertainty. The findings highlight the importance of rating information in the price discovery process and offer policy implications

Does the disclosure of unsolicited sovereign rating status affect bank ratings?

This paper integrates three themes on regulation, unsolicited credit ratings, and the sovereign-bank rating ceiling. We reveal an unintended consequence of the EU rating agency disclosure rules upon rating changes, using data for S&P-rated banks in 42 countries between 2006 and 2013. The disclosure of sovereign rating solicitation status for 13 countries in February 2011 has an adverse effect on the ratings of intermediaries operating in these countries. Conversion to unsolicited sovereign rating status transmits risk to banks via the rating channel. The results suggest that banks bear a penalty if their host sovereign does not solicit its ratings

Does sovereign creditworthiness affect bank valuations in emerging markets?

We analyse the impact of sovereign rating actions by S&P, Moody's and Fitch on bank valuations in emerging markets. We find strong evidence of a rating channel for the transmission of sovereign risk to bank valuations. Collateral and guarantee channels play modest roles, but are more relevant to countries that experienced positive actions. Positive sovereign actions by S&P have the strongest impact on bank valuations. Both negative and positive new rating information, outlook and watch actions are associated with strong market impact. The findings identify clear evidence of links between emerging market governments� external credit standing and banks� market valuation

Macroeconomic implications of behavioural finance theories

In this thesis I consider the extent to which macroeconomic theory and policy evaluation should be based upon behavioural models of human decision making. I review the literature on decision making, and contrast it with the rational paradigm on which economic modelling is traditionally predicated. I also review that part of the macroeconomic literature which is based, explicitly or implicitly, on behavioural theories. I develop a model of behavioural decision making in which investors base their portfolio decision on a choice between two simple heuristical forecasting rules. By simulating the model, I conclude that it can account for the observed history of the FTSE All-Share Index. By comparing this result with the ability of rational expec tations models to account for historical asset prices, I conclude that behavioural theories of decision making do have a useful role in explaining macroeconomic time series. Given that sub-rationality is important in helping to explain the macroecon- omy, the question then arises as to whether there is scope for policy to correct for the misallocation of resources that is caused by this irrationality. I introduce the heuristical decision making model into a wider dynamic stochastic general equilibrium model of the entire economy. This allows me to assess whether using monetary policy to target asset price misalignments can enhance welfare. I find that in my particular model, a counter-intuitive 'running with the wind' monetary policy could enhance welfare. This result is clearly specific to the specification of decision making that I use, and runs counter to other intuitive arguments in favour of a 'leaning against the wind' policy. I, therefore, conclude that a system atic monetary policy response to asset mis-pricing is unlikely to enhance welfare.EThOS - Electronic Theses Online ServiceGBUnited Kingdo

Market reactions to the implementation of the Banking Union in Europe

How did announcements about the implementation of the Banking Union (BU) in Europe impact on financial markets? This paper investigates the effect of the overall bank regulatory reform, considering each associated individual announcement, on Credit Default Swaps (CDS), bank stocks and stock futures during 2012-14. Announcements related to the implementation of the supervisory mechanism, as well as those on the new resolution framework, led to a surge in bank CDS spreads, while having a detrimental effect on the wealth of banks’ shareholders. The CDS market response to sub-events associated with the ECB’s 2014 Comprehensive Assessment (CA) was positive and reflected in a decrease in bank CDS spreads. Furthermore, CDS of Global Systemically Important Banks (G-SIBs) demonstrated a significant reaction to the implementation steps in the BU. Banks’ stock prices reacted in a consistent manner with the CDS market. The stock futures market did not reveal any strong reaction to the changes in the European regulatory landscape. Cross-sectional analysis reveals that bank capitalization is positively associated with responses of G-SIBs’ CDS spreads, but is inversely related to responses of CDS spreads for other bank groups. Weak underlying credit quality is also a relevant factor in explaining abnormal increases in quoted CDS spreads. For the stock market, positive associations of the cumulative abnormal returns (CARs) with capital levels and with the business model orientation are revealed

The impact of ESMA regulatory identifiers on the quality of ratings

This paper investigates the impact of the introduction of ESMA credit rating identifiers on the quality of ratings. These identifiers form part of the disclosure requirements placed upon credit rating agencies (CRAs) since 2012 under a new EU regulatory regime and have not featured in any prior empirical literature. Rating informativeness is gauged from bond market data. Using a rich dataset of sovereign rating actions by the three major CRAs for 70 countries during the period 2006–2016, we find that the ESMA requirement for identifiers yields varying outcomes across downgrades and upgrades. The rating quality associated with downgrades by Moody's improves, whereas upgrades by S&P, Moody's and Fitch are of lower quality. These results are consistent with greater conservatism in rating policies after the regulatory reforms. ESMA's additional focus on analyst location does not reveal any consistent difference in the quality of ratings

The intraday determination of liquidity in the NYSE LIFFE equity option markets

We exploit an extensive high-frequency data set of all individual equity options trading at New York Stock Exchange London International Financial Futures and Options Exchange (Amsterdam, London and Paris) in order to study the determination of liquidity during the trading day. In particular, we focus on two main aspects of option liquidity: (i) the intraday behaviour of equity option liquidity and its determinants and (ii) the influence of macroeconomic events and commonality on intraday equity option liquidity. Inventory management models cannot explain the intraday variation in option spreads and depths. Instead, we show that the option liquidity measures are strongly correlated with option volatility. Increases in volatility are associated with decreases in liquidity, a finding that is in line with information asymmetry models and the derivatives hedging theory. However, the relationship between spreads and volume varies across the three markets. Option liquidity reacts strongly to macroeconomic news announcements, especially US events. The average systematic liquidity component is 12% for Amsterdam, 14% for London and 16% for Paris