The Effect of Italy’s Sovereign Debt Downgrades on Stock Returns

Angelo Marinangeli

There are few studies that take into consideration the effects of the Italian rating downgrade in the context of the current crisis. This paper aims to identify which sovereign debt downgrades have had the highest impact on the stock market. More specifically, the study analyzed a sample of shares belonging to the key sectors, that is, finance, technology, fashion, food and beverage and health sectors. In addition, the analysis was conducted in order to verify if the “border downgrades” have an amplified impact on the stock market than the other ones. It was found, through the ‘event study dummy’ approach methodology, that the transitions from one grade to another have had a greater impact than transitions into the same grade. Moreover, the first Italian downgrade had an important impact on the stock market returns, because this downgrade represented the alarm bell that the crisis was intensifying also in the country under consideration. Only in the technology industry did the first downgrade had no effect. In fact, the technology industry is more robust because it can be defined as the most innovative industry, and so it detected the crisis earlier.