Information value of the credit rating on the credit default swaps market

Patrycja Chodnicka-Jaworska 

University of Warsaw (UW), Krakowskie Przedmieście 26/28, Warsaw 00-927, Poland


The purpose of this article is to check and analyze the impact of changes in credit ratings of European countries broadcast on the cost of premiums for credit default swaps (CDS). In the first part of a review of the literature to date research and based on hypotheses created. There are put two hypothesis. The first one reads as follows: Rating events convey new information and lead to statistically significant abnormal reactions. The second one is: CDS market react stronger on the decrease than increase of countries’ credit ratings. 

The data on the rating events are collected from Thomson Reuters database. Author includes rating events from Standard & Poor’s (S&P) and Moody’s over the period from January 2005 to November 2015. For the preparation of the analysis, the long and short term issuer credit ratings are taken into consideration. The daily CDS spreads for five-year senior unsecured contracts are chosen, as this is by far the most liquid contract. It is used classic event study methodology to analyse the influence of rating events on CDS spreads. There are taken daily differences of the spread and daily log differences representing the percentage adjust. Following Greatrex (2009), the event window consist of the 20 trading days prior to the actual event, the event date (i.e. the announcement day), and the 20 days after the actual event. The change of credit rating implies the change of CDS spread above the mean for 250 trading days observations. To create multiple sets of similar events, there are classified announcements into two event types, downgrades and upgrades of the rating. 

For the changes of the Moody’s long term issue rating the nominal value of the cumulated spreads reacts before the moment of publication of information about credit rating changes. The CDS market verifies stronger the information about changes in the S&P’s long term issue rating after the moment of publication, than in case of the Moody’s credit rating changes. The downgrade of the S&P’s short term issue rating influences stronger on the CDS market than the long term one. In the case of the Standard and Poor Investor Service, credit ratings influence with the similar strength before and after the moment of the event on the CDS spreads.

The second pooling is made for the upgrade. In the case of the influence of the Moody’s long term issue rating on the CDS spreads is not observed. Both for S&P’s the long and short term issue credit rating changes is observed the negative impact on the cost of capital. The mentioned relationship is weaker for the long term issue ratings. The changes of CDS spreads for the short and long term issue rating proposed by S&P’s decrease the cumulative value of the CDS spreads stronger before after the moment of the event.

The observation of the percentage changes of the European countries’ CDS spreads suggests that the CDS market is more sensitive on the Standard& Poor’s credit ratings changes. CDS spreads rise during the preannouncement window, smaller changes are observed for the moment of publication of the information and during the postannouncement window are noticed market corrections.

In the case of the upgrade of the Moody’s long term issue credit ratings, before the moment of event CDS spreads rise. The decrease of the mentioned spreads is noticed during the moment of publication information about upgrade. After the publication CDS are market is unsensitised on the analysed determinant. For the pool of the S&P’s long term issue credit rating changes , the CDS spread increases in the preannouncement window, is insensitive during the publication and decreases in the postannouncement window. The positive change of the short term countries’ credit ratings causes the reduction of the CDS spreads before and after the publication of the information. During the event window the mentioned spreads are insensitive on the credit rating changes in the short term.


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Presentation: Oral at Current Economic and Social Topics 2015, by Patrycja Chodnicka-Jaworska
See On-line Journal of Current Economic and Social Topics 2015

Submitted: 2015-11-24 23:23
Revised:   2015-12-04 14:45