Do Market-Based Indicators Anticipate Rating Agencies? Evidence for International Banks

45 Pages Posted: 14 Jul 2006

Multiple version iconThere are 2 versions of this paper

Date Written: May 2006

Abstract

This paper analyzes the ability of credit default swap spreads, bond spreads and stock prices to anticipate the decisions of the main rating agencies, for the largest international banks. Conditional on negative rating events, all the three indicators show significant abnormal changes before both announcements of review and actual credit rating changes, but rating actions still seem to convey new information to the market. Results for positive rating events are less clear-cut with the market indicators generally showing abnormal behaviors only in conjunction with the events. As for the predictive power of the financial indicators examined, the CDS market is particularly useful for negative events and stock prices for positive events. However, all indicators also send many false signals and are to be interpreted with care.

Keywords: Credit derivatives, credit default swaps, option-adjusted spreads, credit ratings

JEL Classification: G14, G21

Suggested Citation

Di Cesare, Antonio, Do Market-Based Indicators Anticipate Rating Agencies? Evidence for International Banks (May 2006). Bank of Italy Economic Research Paper No. 593. Available at SSRN: https://ssrn.com/abstract=915362 or http://dx.doi.org/10.2139/ssrn.915362

Antonio Di Cesare (Contact Author)

Bank of Italy ( email )

Via Nazionale 91
00184 Roma
Italy

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