The influence of sovereign credit ratings on sovereign credit default swaps: do splits matter?

Kok-tiong Lim (), Kim-Leng Goh and Kian-teng Kwek ()
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Kok-tiong Lim: Faculty of Business and Economics, University of Malaya
Kian-teng Kwek: Faculty of Business and Economics, University of Malaya

Economics Bulletin, 2021, vol. 41, issue 4, 2433-2444

Abstract: This paper compares the influence of sovereign credit ratings (SCRs) issue by three credit rating agencies (CRAs) on sovereign credit default swaps (SCDSs) that is adopted as a proxy for debt pricing. The sample covers quarterly observations from 2008 to 2020 for 32 countries that were graded by all the three CRAs. The generalized methods of moment based on forward orthogonal deviation transformation is used for estimation. During the period 2008-2011 when a divergence in the SCRs issued by the three CRAs was apparent, the SCRs were relevant for pricing of the SCDSs. The influence of the SCRs issued by Fitch and the combination of Fitch and Moody's on SCDSs is the largest. This indicates a market preference for the SCRs issued by specific CRAs and the splits in creditworthiness opinions matter for debt pricing. On the contrary, when such splits are almost negligible in the period 2012-2020, the convergence in the SCRs issued by the different CRAs did not have the expected influence on SCDSs. This calls for further investigation into the influence of non-sovereign risk factors on debt pricing.

Keywords: Credit Rating Agency; Sovereign credit default swaps, Sovereign credit ratings, Split ratings (search for similar items in EconPapers)
JEL-codes: G1 G2 (search for similar items in EconPapers)
Date: 2021-12-29
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