Informational Efficiency of Credit Default Swap and Stock Markets: The Impact of Credit Rating Announcements

Martin Weber and Lars Norden

No 4250, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: This Paper analyses the response of stock and credit default swap (CDS) markets to rating announcements by the three major rating agencies during 2000-02. Applying event study methodology, we examine whether and how strongly these markets respond to rating announcements in terms of abnormal returns and adjusted CDS spread changes. First, we find that both markets not only anticipate rating downgrades but also reviews for downgrade by all three agencies. Second, a combined analysis of different rating events within and across agencies reveals that reviews for downgrade by Standard & Poor?s and Moody?s exhibit the largest impact on both markets. Third, the magnitude of abnormal performance in both markets is influenced by the level of the old rating, previous rating events and, only in the CDS market, by the pre-event average rating level by all agencies.

Keywords: Credit ratings; Credit default swaps; Informational efficiency; Event study (search for similar items in EconPapers)
JEL-codes: G14 G20 (search for similar items in EconPapers)
Date: 2004-02
New Economics Papers: this item is included in nep-cfn, nep-fmk and nep-rmg
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Citations: View citations in EconPapers (303)

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Journal Article: Informational efficiency of credit default swap and stock markets: The impact of credit rating announcements (2004)
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