The link between the credit rating agency downgrades in times of crisis and the dynamics of government credit default swap yield spreads

Tarek Chebbi, Fathi Nakai and Waleed Hmedat

International Journal of Sustainable Economy, 2024, vol. 16, issue 2, 154-183

Abstract: This paper analyses the impact of credit rating agencies downgrades on the dynamic of government credit default swap (CDS) yield spreads during the most stressful period of the eurozone debt crisis (2010-2012). Our research is released by the event study approach that includes direct effects on the risk and return of CDS market. We obtain some new results. As for immediate effect, we find downgrades and outlook announcements significantly affect sovereign CDS yield spreads but had little or no impact on the volatility. Regarding the dynamic effect, such announcements are anticipated by CDS markets in [-3, 0] which are consistent with efficient markets hypothesis, while watchlist events considerably influence CDS yield spreads around the announcement day, which is on concordance with credit rating agencies information discovery effect hypothesis. Furthermore, we confirm the association of CDS yield spreads with stock and foreign exchange markets.

Keywords: credit rating agencies; credit default swaps spreads; debt crisis; spillovers; event study dummy approach. (search for similar items in EconPapers)
Date: 2024
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