Rating Agencies' Monitoring and Certification Services - Evidence from the Sovereign CDS Market

19 Pages Posted: 11 Jan 2014

See all articles by Thomas Reinhard Kremser

Thomas Reinhard Kremser

Vienna University of Economics and Business - Institute for Finance, Banking and Insurance

Daniela Kremslehner

Vienna University of Economics and Business - Department of Finance, Accounting & Statistics

Margarethe Rammerstorfer

Vienna University of Economics and Business - Department of Corporate Finance

Date Written: December 23, 2013

Abstract

This paper investigates the reaction of credit default swaps spreads to changes in rating class, outlook, and watchlist entries for sovereigns. We find a stronger response to negative outlook and watchlist changes than for actual rating class downgrades, which shows that negative outlook and watchlist changes reveal more information. Consistently, we are able to predict future negative outlook changes and negative watchlist entries from abnormal CDS movements. Abnormal credit default swaps spread responses are analyzed with an unrestricted market model, which allows a sound interpretation of the reaction while controlling for market movements. Additionally, we compare the reaction of high and low quality obligors to credit rating agencies' announcements with respect to timing and magnitude. We find more signicant reactions for low quality sovereigns with higher magnitudes before and at the announcement day, indicating higher sensitivity to rating changes compared to high quality obligors.

Keywords: Credit default swaps, Sovereign credit ratings, Credit rating agencies, Information content, Event study

JEL Classification: G10, G12, G13, G14, G20

Suggested Citation

Kremser, Thomas Reinhard and Kremslehner, Daniela and Rammerstorfer, Margarethe, Rating Agencies' Monitoring and Certification Services - Evidence from the Sovereign CDS Market (December 23, 2013). Available at SSRN: https://ssrn.com/abstract=2376822 or http://dx.doi.org/10.2139/ssrn.2376822

Thomas Reinhard Kremser (Contact Author)

Vienna University of Economics and Business - Institute for Finance, Banking and Insurance ( email )

Welthandelsplatz 1
Vienna, 1020
Austria

Daniela Kremslehner

Vienna University of Economics and Business - Department of Finance, Accounting & Statistics ( email )

Welthandelsplatz 1
Vienna, 1020
Austria

Margarethe Rammerstorfer

Vienna University of Economics and Business - Department of Corporate Finance ( email )

Welthandelsplatz 1
1020 Vienna
Austria

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