Informational Efficiency of Credit Default Swap and Stock Markets: The Impact of Credit Rating Announcements

45 Pages Posted: 19 Mar 2004

See all articles by Lars Norden

Lars Norden

Getulio Vargas Foundation (FGV) - Brazilian School of Public and Business Administration (EBAPE); Getulio Vargas Foundation (FGV) - FGV/EPGE Escola Brasileira de Economia e Finan├žas

Martin Weber

University of Mannheim - Department of Banking and Finance

Date Written: February 2004

Abstract

This Paper analyses the response of stock and credit default swap (CDS) markets to rating announcements by the three major rating agencies during 2000-02. Applying event study methodology, we examine whether and how strongly these markets respond to rating announcements in terms of abnormal returns and adjusted CDS spread changes. First, we find that both markets not only anticipate rating downgrades but also reviews for downgrade by all three agencies. Second, a combined analysis of different rating events within and across agencies reveals that reviews for downgrade by Standard & Poor's and Moody's exhibit the largest impact on both markets. Third, the magnitude of abnormal performance in both markets is influenced by the level of the old rating, previous rating events and, only in the CDS market, by the pre-event average rating level by all agencies.

Keywords: Credit ratings, credit default swaps, informational efficiency, event study

JEL Classification: G14, G20

Suggested Citation

Norden, Lars and Weber, Martin, Informational Efficiency of Credit Default Swap and Stock Markets: The Impact of Credit Rating Announcements (February 2004). Available at SSRN: https://ssrn.com/abstract=511102

Lars Norden

Getulio Vargas Foundation (FGV) - Brazilian School of Public and Business Administration (EBAPE) ( email )

Rua Jornalista Orlando Dantas 30
Rio de Janeiro, 22231-010
Brazil
+552130832431 (Phone)

HOME PAGE: http://www.larsnorden.de

Getulio Vargas Foundation (FGV) - FGV/EPGE Escola Brasileira de Economia e Finan├žas ( email )

Praia de Botafogo 190/1125, CEP
Rio de Janeiro RJ 22253-900
Brazil

Martin Weber (Contact Author)

University of Mannheim - Department of Banking and Finance ( email )

D-68131 Mannheim
Germany
+49 621 181 1532 (Phone)
+49 621 181 1534 (Fax)

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