The Effect of Credit Ratings on Credit Default Swap Spreads and Credit Spreads

18 Pages Posted: 13 Dec 2005 Last revised: 13 Nov 2007

See all articles by Kenneth N. Daniels

Kenneth N. Daniels

Daniels Foundation for Impact Investments and Development

Malene Shin Jensen

University of Aarhus - Department of Management

Abstract

This paper investigates empirically the relationship between credit spreads and credit default swap spreads, and how these spreads react to changes in credit ratings. Our findings suggest a clear relationship between the two spreads and that credit rating and macroeconomic factors add significant information to this relationship. Furthermore, we find that both spreads react to changes in credit ratings and in particular to downgrades. We discover anticipated and lagged effects of changes in credit rating and differences between investment grades. Interestingly, the CDS market seems to reacts faster and more significantly than the bond market to changes in credit ratings.

Keywords: Credit Risk, Credit Default Swaps, Credit Rating, Principal Component Analysis, Event Study

JEL Classification: G13, G14

Suggested Citation

Daniels, Kenneth N. and Shin Jensen, Malene, The Effect of Credit Ratings on Credit Default Swap Spreads and Credit Spreads. Journal of Fixed Income, December 2005, Available at SSRN: https://ssrn.com/abstract=868688

Kenneth N. Daniels (Contact Author)

Daniels Foundation for Impact Investments and Development ( email )

New Jersey, NJ 07018
United States

Malene Shin Jensen

University of Aarhus - Department of Management ( email )

Building 322
DK-8000 Aarhus C
Denmark
+45 89 42 15 70 (Phone)
+45 86 13 51 32 (Fax)

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