Abstract

http://ssrn.com/abstract=1666350
 
 

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Credit Default Swap Spreads as Viable Substitutes for Credit Ratings


Mark J. Flannery


University of Florida - Department of Finance, Insurance and Real Estate

Joel F. Houston


University of Florida - Department of Finance, Insurance and Real Estate

Frank Partnoy


University of San Diego School of Law

August 26, 2010

University of Pennsylvania Law Review, Vol. 158, 2010
San Diego Legal Studies Paper No. 10-031

Abstract:     
We evaluate the viability of credit default swaps (CDS) spreads as substitutes for credit ratings. We focus on CDS spreads based on the obligations of financial institutions, particularly fifteen large financial institutions that were prominently involved in the recent financial crisis. Our data, from 2006-09, show that CDS spreads incorporate new information about as quickly as equity prices, and significantly more quickly than credit ratings. Although CDS spreads did not identify accumulating risk exposures before 2007, they quickly reflected disclosures and developments beginning in summer 2007 at the latest. Thus, CDS spreads are a promising market-based tool for regulatory and private purposes, and they may serve as a viable substitute for credit ratings.

Number of Pages in PDF File: 40

Keywords: credit ratings, credit default swaps, finance, structured finance, event studies

JEL Classification: C10, D40, D43, G12, G18, G28, G38, K20, K22, K23, L10, L40

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Date posted: August 27, 2010 ; Last revised: September 3, 2010

Suggested Citation

Flannery , Mark J. and Houston, Joel F. and Partnoy, Frank, Credit Default Swap Spreads as Viable Substitutes for Credit Ratings (August 26, 2010). University of Pennsylvania Law Review, Vol. 158, 2010; San Diego Legal Studies Paper No. 10-031. Available at SSRN: http://ssrn.com/abstract=1666350

Contact Information

Mark Jeffrey Flannery
University of Florida - Department of Finance, Insurance and Real Estate ( email )
P.O. Box 117168
Gainesville, FL 32611
United States
352-392-3184 (Phone)
352-392-0103 (Fax)
Joel F. Houston
University of Florida - Department of Finance, Insurance and Real Estate ( email )
P.O. Box 117168
Gainesville, FL 32611
United States
Frank Partnoy (Contact Author)
University of San Diego School of Law ( email )
5998 Alcala Park
San Diego, CA 92110-2492
United States
619-260-2352 (Phone)
619-260-4180 (Fax)
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