Are Credit Rating Agencies Discredited? Measuring Market Price Effects from Agency Sovereign Debt Announcements

51 Pages Posted: 19 Feb 2018

See all articles by Mahir Binici

Mahir Binici

University of California, Santa Cruz; International Monetary Fund (IMF)

Michael M. Hutchison

University of California, Santa Cruz - Department of Economics

Evan Weicheng Miao

Central Bank of the Republic of China (Taiwan) - Department of Economic Research

Date Written: February 2018

Abstract

This paper investigates whether the price response to credit rating agency (CRA) announcements on sovereign bonds has diminished since the Global Financial Crisis (GFC). We characterize credit rating events more precisely than previous work, controlling agency announcements for the prior credit state - outlook, watch/review, or stable status as well as the level of the credit rating. Emphasizing the transition from one state to another allows us to distinguish between different types of announcement (rating changes, watch and outlook events) and their price effects. We employ an event study methodology and gauge market response by standardized cumulative abnormal returns (SCAR) and directional change statistics in daily credit default swap (CDS) spreads. We find that rating announcements provide a rich and varied set of information on how credit rating agencies in fluence market perceptions of sovereign default risk. CRA announcements continued to have significant effects on CDS spreads after the GFC, but the magnitude of the responses generally fell. Moreover, we find that accurate measurement of these effects depends on conditioning for the prior credit state of the sovereign bond.

Keywords: CDS spreads, credit ratings, sovereign debt

JEL Classification: F30, G01, G24, H63

Suggested Citation

Binici, Mahir and Hutchison, Michael M. and Weicheng Miao, Evan, Are Credit Rating Agencies Discredited? Measuring Market Price Effects from Agency Sovereign Debt Announcements (February 2018). BIS Working Paper No. 704, Available at SSRN: https://ssrn.com/abstract=3125010

Mahir Binici

University of California, Santa Cruz ( email )

1156 High St
Santa Cruz, CA 95064
United States

International Monetary Fund (IMF)

700 19th Street, N.W.
Washington, DC 20431
United States

Michael M. Hutchison (Contact Author)

University of California, Santa Cruz - Department of Economics ( email )

Social Sciences I
Santa Cruz, CA 95064
United States
831-459-2600 (Phone)
831-459-5900 (Fax)

Evan Weicheng Miao

Central Bank of the Republic of China (Taiwan) - Department of Economic Research

No. 2, Section 1, Roosevelt Rd
Zhongzheng District
Taipei City
Taiwan

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