Based On The National Debt Sovereign Credit Rating Of The Research On The Influence Of The Exchange Rate

This paper examines the impacts of Eurozone sovereign credit rating announcements by three leading rating agencies (Standard&Poor’s, Fitch and Moody’s) on exchange rates from January1,2009to October31,2011. By applying EGARCH model, firstly we report the mean level and volatility of USD/EUR in response to Eurozone sovereign rating news. Secondly, thanks to the high integration in Europe, we extend our analysis to the movement of USD/SEK in order to see how non-Eurozone countries, such as Sweden, are affected by Eurozone sovereign rating news. Furthermore, we exclude the sovereign rating news concerning some small Eurozone countries during this period to observe any different results. We conclude that sovereign rating announcements greatly affect the volatility rather than the mean level of USD/EUR. It is noteworthy that the market participants only react to the news of review concerning large economies and the news of outlook changes from small economies. However, regardless of the size of the country, when its sovereign rating is actually upgraded or downgraded, the financial market tends to ignore those grade adjustments. This verifies the existence of investors’ expectations. The financial market tends to react more to the "possible actions" rather than the "real actions". On the other hand, Eurozone sovereign rating events only slightly influence the mean level of USD/SEK, which implies that non-Eurozone European countries, such as Sweden, are somewhat indirectly affected by Eurozone sovereign debt crisis. In the end, it is specified the implications for China.