Effect of European Sovereign debt crisis on banks’ stock market performances: application to Portuguese data

Abstract

This paper studies the impact of the European sovereign debt crisis on Portuguese banks’ share prices. I employ an event study methodology to assess the behavior of banks’ share prices before, and after a credit rating announcement in relation to both the sovereign and the banks individually. I find that sovereign credit ratings have a significant impact on banks’ stock market returns while individual bank credit ratings seem to have little influence. This is probably due to the fact that banks’ credit ratings have been reflecting changes in sovereign ratings rather than any idiosyncratic factors of banks’ solvency. Among the rating agencies studied the most predominant is Standard & Poor’s. Furthermore, I find that the behavior of banks’ stock returns exhibit a certain degree of market inefficiency and anticipation.