Working Paper: CEPR ID: DP4250
Authors: Lars Norden; Martin Weber
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 default swaps; credit ratings; event study; informational efficiency
JEL Codes: G14; G20
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| anticipation of downgrades (D84) | market behavior (D40) |
| rating downgrades (G24) | significant negative abnormal return (G14) |
| reviews for downgrades (Y30) | significant negative abnormal return (G14) |
| rating announcements (G24) | market adjustments (M52) |
| previous rating level (C52) | magnitude of market reactions (G10) |
| nature of rating event (C52) | magnitude of market reactions (G10) |
| anticipation of downgrades (D84) | significant market reactions 60-90 days prior (G14) |