CDS volatility: the key signal of credit quality

Rosella Castellano and Rita D’Ecclesia ()

Annals of Operations Research, 2013, vol. 205, issue 1, 89-107

Abstract: This paper investigates the role of CDS volatility in providing information concerning the credit quality of a company. In Castellano and D’Ecclesia (J. Financ. Decis. Mak. 2:27, 2011 ) a first analysis of how CDS quotes respond to rating announcements is provided and it showed that market participants do not rely much on Rating Agencies, especially during periods characterized by very high volatility, i.e. during a financial crisis. Here, a more accurate analysis of the CDS’s ability to provide timely information on the creditworthiness of reference entities is performed, estimating the volatility of CDS quotes by using Exponential GARCH(1,1) models. The event study methodology is applied to a sample of CDS quotes for US and European markets, over the period 2004–2009. Results provide an accurate understanding of market behavior in the presence of news released by Rating Agencies. Overall, market participants seem to provide timely reactions around the event date and we show that the key element of signaling is represented by the changing volatility in CDS quotes, before and after the rating event. Copyright Springer Science+Business Media New York 2013

Keywords: Credit default swaps; Event study; Exponential GARCH (search for similar items in EconPapers)
Date: 2013
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (10)

Downloads: (external link)
http://hdl.handle.net/10.1007/s10479-012-1244-9 (text/html)
Access to full text is restricted to subscribers.

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:spr:annopr:v:205:y:2013:i:1:p:89-107:10.1007/s10479-012-1244-9

Ordering information: This journal article can be ordered from
http://www.springer.com/journal/10479

DOI: 10.1007/s10479-012-1244-9

Access Statistics for this article

Annals of Operations Research is currently edited by Endre Boros

More articles in Annals of Operations Research from Springer
Bibliographic data for series maintained by Sonal Shukla () and Springer Nature Abstracting and Indexing ().