The Relationship between Credit Default Swap Spreads, Bond Yields, and Credit Rating Announcements

38 Pages Posted: 10 Nov 2012

See all articles by Mirela Predescu

Mirela Predescu

BNP Paribas, London

John C. Hull

University of Toronto - Rotman School of Management

Alan White

University of Toronto - Rotman School of Management

Date Written: January 9, 2004

Abstract

A company’s credit default swap spread is the cost per annum for protection against a default by the company. In this paper we analyze data on credit default swap spreads collected by a credit derivatives broker. We first examine the relationship between credit default spreads and bond yields and reach conclusions on the benchmark risk-free rate used by participants in the credit derivatives market. We then carry out a series of tests to explore the extent to which credit rating announcements by Moody’s are anticipated by participants in the credit default swap market.

Suggested Citation

Predescu, Mirela and Hull, John C. and White, Alan, The Relationship between Credit Default Swap Spreads, Bond Yields, and Credit Rating Announcements (January 9, 2004). Rotman School of Management Working Paper No. 2173171. Available at SSRN: https://ssrn.com/abstract=2173171 or http://dx.doi.org/10.2139/ssrn.2173171

Mirela Predescu (Contact Author)

BNP Paribas, London ( email )

10 Harewood Avenue
London, NW1 6AA
United Kingdom

John C. Hull

University of Toronto - Rotman School of Management ( email )

105 St. George Street
Toronto, Ontario M5S 3E6 M5S1S4
Canada
(416) 978-8615 (Phone)
416-971-3048 (Fax)

Alan White

University of Toronto - Rotman School of Management ( email )

105 St. George Street
Toronto, Ontario M5S 3E6 M5S1S4
Canada
416-978-3689 (Phone)
416-971-3048 (Fax)

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