Do Market-Based Indicators Anticipate Rating Agencies? Evidence for International Banks
45 Pages Posted: 14 Jul 2006
Date Written: May 2006
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: Suggested Citation