Do credit rating agencies provide valuable information in market evaluation of sovereign default Risk?

Mahir Binici and Michael Hutchison

Journal of International Money and Finance, 2018, vol. 85, issue C, 58-75

Abstract: We assess the marginal information value of credit rating announcements on market pricing of sovereign risk as measured by CDS spreads. We demonstrate that accurate assessment of the effect of credit rating changes must be conditioned on relevant information known prior to the rating change. To this end, we include macroeconomic conditions and the watch or outlook status of the bond immediately prior to the rating change in our information set. The empirical work employs a dynamic panel macroeconomic model with 56 countries using monthly data from January 2004 through August 2012. We find that watch/outlook status plays a critical role in accurately determining the information value of credit rating changes, with point estimates in some cases changing by a factor of eight. CDS spreads respond most strongly to credit rating changes when bonds are on stable status, but also respond significantly when bonds are on outlook status. The least response is found for bonds on watch status at the time of the downgrade—the downgrades in these cases are largely anticipated, and the information value incorporated at the time of the negative watch announcements.

Keywords: CDS spreads; Credit ratings; Sovereign debt (search for similar items in EconPapers)
JEL-codes: F30 G01 G24 H63 (search for similar items in EconPapers)
Date: 2018
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (10)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0261560618302006
Full text for ScienceDirect subscribers only

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:jimfin:v:85:y:2018:i:c:p:58-75

DOI: 10.1016/j.jimonfin.2018.04.001

Access Statistics for this article

Journal of International Money and Finance is currently edited by J. R. Lothian

More articles in Journal of International Money and Finance from Elsevier
Bibliographic data for series maintained by Catherine Liu ().