GOOD FORECASTING OR INFORMATION LEAKAGE EXPLAINING MARKET BEHAVIOR PRIOR TO THE ANNOUNCEMENT OF SOVEREIGN RATING DOWNGRADES: EVIDENCE FROM TURKEY

Year 2020, Volume: 42 Issue: 2, 327 - 339, 31.12.2020

Saim Kılıç Ali Alp İhsan Uğur Delikanlı

https://doi.org/10.14780/muiibd.854499

https://izlik.org/JA82EJ49PB

Abstract

This paper aims to empirically test the impact of Turkey’s sovereign credit rating downgrades by three
major credit rating agencies on the Borsa İstanbul equity market prior to the official announcement,
and to ascertain whether any significant impact found is due to market players’ accurate forecasting or
information leakages. In this paper, the effects of nine downgrade announcements between 2016 and 2018
are analyzed using the Event Study method. In eight of the nine events, statistically significant negative
cumulative abnormal returns were estimated during the five trading days before the announcement.
Evidence suggests that three of the eight events reflected information leakage to the market, and five
indicated sound forecasting by market players alongside some information leakage. These results reveal
that it is necessary to take preventive measures against information leakage before the announcement of
the ratings assessments.

Keywords

Sovereign Credit Rating , Information Leakage , Insider Trading , Market Forecasting , Event Study

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