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2022•Journal of East-West BusinessRequires access

The Impact of Sovereign Credit Rating News on Credit Default Swap Spreads

Övünç Gürsoy, Emin Avcı

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Abstract

This paper explores the impact of sovereign credit rating news from three credit rating agencies, namely Moody’s, Fitch, and Standard & Poors, on credit default swaps (CDS). We use an event study methodology to analyze how CDS spread reacts to sovereign CR (Credit Rating) rating news in 31 countries between 2005 and 2018. The effects of rating news on CDS spread are conditional on the prior status of the rating watch or outlook. The results show that CDS spreads respond significantly more toward negative rating news. We find that sovereign rating announcements have different effects in developed and emerging markets.

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What this paper is about

This paper explores the impact of sovereign credit rating news from three credit rating agencies, namely Moody’s, Fitch, and Standard & Poors, on credit default swaps (CDS). We use an event study methodology to analyze how CDS spread reacts to sovereign CR (Credit Rating) rating news in 31 countries between 2005 and 2018. The effects of rating news on CDS spread are conditional on the prior status of the rating watch or outlook. The results show that CDS spreads respond significantly more toward negative rating news. We find that sovereign rating announcements have different effects in developed and emerging markets.

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Available abstract

This paper explores the impact of sovereign credit rating news from three credit rating agencies, namely Moody’s, Fitch, and Standard & Poors, on credit default swaps (CDS). We use an event study methodology to analyze how CDS spread reacts to sovereign CR (Credit Rating) rating news in 31 countries between 2005 and 2018. The effects of rating news on CDS spread are conditional on the prior status of the rating watch or outlook. The results show that CDS spreads respond significantly more toward negative rating news. We find that sovereign rating announcements have different effects in developed and emerging markets.

Key concepts: Sovereign credit, Credit default swap, Credit rating, Bond credit rating, Business, Financial system, Credit risk, Sovereignty

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