Credit rating changes and the government cost of borrowing in Turkey

Murat Gürer, Pınar Derin Güre


Standard and Poor’s (S&P), Moody’s and Fitch have been producing credit ratings for government bonds and corporate bonds.  Changes in credit ratings affect the investors’ decisions and government cost of borrowing as well. 2008 global financial crisis is an important milestone for the credit rating agencies since during the crisis period high rated countries faced with deep economic fluctuations, which decreased creditworthiness of these agencies. This paper investigates the relationship between sovereign bond spreads and rating changes during the post-crisis period for Turkey. The relationship between credit rating/outlook changes and cost of borrowing in Turkey has not been investigated in an academic paper before.  Therefore we perform vector autoregression (VAR) model including Granger causality test and impulse response functions (IRFs) analysis to investigate the effects of rating changes on the Turkish government bond spreads from July 2007 to March 2013. We also apply event study analysis in order to capture the dynamic effects of rating changes on Turkish government bond spreads. This analysis gives some evidences that rating announcements are often anticipated by the market so investors take their position before announcement day, which leads to insignificant results in VAR estimates. 


Credit rating, government borrowing, vector autoregression, event study, market anticipation

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