Abstract
M.Com. (Investment Management)
The increasing role of credit rating agencies in emerging markets and the various impacts that these rating agencies have on emerging market economies have become of great interest in modern finance. The main aim of this study is to determine the spillover effects of a South African sovereign credit rating downgrade on the South African retail banking sector. The four objectives of this study are: to determine whether a sovereign ceiling channel exists between the South African sovereign credit rating and the corporate credit ratings of the retail banks under analysis; to determine the effects of a South African sovereign credit rating downgrade on the share price of each bank under analysis by means of determining whether a South African sovereign credit rating downgrade caused any significant abnormal returns in the share price; to establish whether a South African sovereign credit rating change caused any volatility spillovers to the shares of the banks under analysis; and, finally, to ascertain whether a South African sovereign credit rating change had a significant impact on the fundamental variables of the banks under analysis. By making use of regression methodology it is shown that a sovereign ceiling channel exists between the South African sovereign credit rating and the corporate credit ratings of South African retail banks. Furthermore, an event study analysis was conducted to provide evidence that a South African sovereign credit rating downgrade does cause abnormal returns in the shares of South African retail banks. It is also presented by means of a GARCH-BEKK model that South African sovereign credit rating changes caused volatility spillovers to the shares of South African retail banks. Finally, despite the negative share price effect of a South African sovereign credit rating downgrade, ARDL methodology provided evidence that a South African sovereign credit rating change does not always have a significant impact on key fundamental aspects of South African retail banks.