The Information Content of Ratings: An Analysis of Australian CDS Spreads

39 Pages Posted: 15 Nov 2011

See all articles by Jue Wang

Jue Wang

University of Sydney Business School

Jiri Svec

The University of Sydney - Discipline of Finance

Maurice Peat

The University of Sydney; Financial Research Network (FIRN)

Date Written: November 14, 2011

Abstract

We examine the information content of Australian credit rating announcements by measuring the abnormal changes in credit default swap (CDS) spreads. CDS spreads provide a direct view of credit quality and thus should impound information quickly when investors receive new credit risk-related information via a ratings event. Using an Australian event study, we show that negative credit watches and rating upgrades contain valuable information even after controlling for sources of contamination. We find that negative credit watches elicit statistically significant market reactions: however, subsequent downgrades are anticipated. Upgrades are associated with a significant but small abnormal reduction in CDS spreads, whereas positive credit watches appear to contain no new information.

Keywords: Credit rating, Ratings changes, Credit default swaps, Event study, Market reaction, Emerging market

JEL Classification: G14, G20

Suggested Citation

Wang, Jue and Svec, Jiri and Peat, Maurice, The Information Content of Ratings: An Analysis of Australian CDS Spreads (November 14, 2011). Available at SSRN: https://ssrn.com/abstract=1787830 or http://dx.doi.org/10.2139/ssrn.1787830

Jue Wang (Contact Author)

University of Sydney Business School ( email )

Cnr. of Codrington and Rose Streets
Sydney, NSW 2006
Australia

Jiri Svec

The University of Sydney - Discipline of Finance ( email )

P.O. Box H58
Sydney, NSW 2006
Australia
+61 2 9036 6241 (Phone)

Maurice Peat

The University of Sydney ( email )

University of Sydney
Sydney, NSW 2006
Australia

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

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