The Dilemma of International Diversification : Evidence from the European Sovereign Debt Crisis

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Title: The Dilemma of International Diversification : Evidence from the European Sovereign Debt Crisis
Author: Francis, Bill B. ; Hasan, Iftekhar ; Kostova, Gergana L. ; Ben Naceur, Sami
Series: Asia-Pacific Journal of Financial Studies
Series volume: 49
Series number: 2
Year of publication: 2020
Publication date: 14.4.2020
DOI: https://doi.org/10.1111/ajfs.12293
Page range: 299-346
Keywords: pankit; Eurooppa; pääomamarkkinat; hajautus; valtionvelka; kriisit; luottoluokitukset
Other keywords: banks; sovereign debt crisis; international diversification; Europe
Abstract: This paper tests how capital markets value the international diversification of banks in good and in bad economic times by investigating changes in domestic and foreign sovereign debt ratings before and during the European sovereign debt crisis. Tracing 320 European banks in 29 countries and 226 credit rating announcements for European sovereigns between 1 January 2001 and 15 August 2012, we show that the market values banks with access to foreign funds. Despite occasional adverse effects immediately following negative news regarding sovereign credit rating changes, international diversification was found to be beneficial to European banks, especially during periods of distress.


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