The sovereign yield curve and credit ratings in GIIPS

© 2020 International Review of Finance Ltd. 2020 This paper studies the impact of sovereign credit rating and outlook changes on the shape of the sovereign yield curve using data for five European countries, namely, Greece, Ireland, Italy, Portugal, and Spain, known as the GIIPS for the period of 2001–2016. We use the dynamic Nelson–Siegel model to estimate the level, slope, and curvature of the yield curve. Subsequently, we employ the vector autoregressive model to estimate the effect of sovereign rating and outlook changes on the sovereign yield curve. We find a significant effect of rating downgrades and an insignificant effect of rating upgrades in all five countries; however, the results for the effect of changes in outlook status are mixed. Our results remain robust to various sensitivity tests