The Relationship between Credit Default Swap Spreads, Bond Yields, and Credit Rating Announcements
38 Pages Posted: 10 Nov 2012
Date Written: January 9, 2004
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.
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