Rating agencies play an important role on the capital markets; however, during the financial crisis 2007-2009 people began to question how good their assessments of credit quality really are. In my study, I empirically examine the effect of rating announcements from Standard & Poor’s on the Credit Default Swap (CDS) Market. It contributes to the field of rating agencies’ performance measurement. Based on Event Study Methodology and recent CDS data, I detect virtually no significant abnormal spread
change at the announcement date neither for downgrades nor upgrades. However, the CDS show some anticipation prior to the event especially for downgradings. Considering the rating date, I find evidence for an asymmetric reaction where downgrades cause stronger movement in the spreads. As a result, it seems as if rating changes do not convey a great part of new information to the markets. At the same time, the significant anticipation indicates that the CDS market processes information more efficiently.
Table of Contents
List of Tables
List of Figures
1 Introduction
2 Rating Agencies and the Market for Credit Risk
3 Previous Literature and Hypotheses
4 Data
4.1 Ratings
4.2 Credit Default Swap Spreads
5 Methodology
5.1 Framework
5.2 Hypothesis Testing
6 Empirical Results
6.1 Event Studies
6.2 Regressions
6.3 Discussion
7 Conclusion
8 References
9 Appendix: Robustness Test
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