The impact and the spillover effect of a sovereign rating announcement on the euro area CDS market

Danilo Drago and Raffaele Gallo

Journal of International Money and Finance, 2016, vol. 67, issue C, 264-286

Abstract: This paper analyzes the impact and the spillover effect of a sovereign rating announcement on the euro area CDS market. Through the event study technique, we demonstrate that downgrades and upgrades considerably affect financial markets. The relevance of the impact is due to the introduction of “new” information after a rating change announcement (information discovery effect) and to the role of rating in the current financial regulation (certification effect). Conversely, the CDS market does not seem to react significantly to rating warning (outlook and review) announcements. Furthermore, we find evidence of a spillover effect only after a downgrade announcement. Our results show that the size of the spillover effect is influenced by economic and financial conditions of analyzed countries and that international bank flows between EMU Members represent an important transmission channel of the spillover effect.

Keywords: Sovereign credit ratings; Credit default swaps; Event study; Spillover effect; Bank flows (search for similar items in EconPapers)
JEL-codes: G14 G15 G21 G24 (search for similar items in EconPapers)
Date: 2016
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (33)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jimfin:v:67:y:2016:i:c:p:264-286

DOI: 10.1016/j.jimonfin.2016.06.004

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