Advertisement

Review of Managerial Science

, Volume 6, Issue 3, pp 239–264 | Cite as

CDS and rating announcements: changing signaling during the crisis?

  • Rosella Castellano
  • Luisa Scaccia
Original Paper

Abstract

In parallel with the development of credit derivatives market, researchers have begun to explore the relationship between Credit Default Swap (CDS) market and rating events. Many papers, via classical event-study methodology, show that CDS market is able to signal future negative rating events announced by credit rating agencies. In this work, we incorporate into the event-study methodology the ability of Markov switching models in modeling state-dependent means and variances. This approach allows to get over the drawbacks of the classical methodology, which ignores the heteroscedasticity and volatility clustering often affecting financial time series. The proposed methodology is applied to study the reactions of CDS quotes to reviews for downgrading and effective downgradings announced by the three major credit rating agencies (Fitch Ratings, Moody’s, Standard and Poor’s), in order to examine if and to what extent CDS market anticipates announcements related with a company’s creditworthiness. The analysis, focusing mainly on volatility, is performed on two periods, 2004–2006 and 2007–2009, in order to verify whether a change in the signaling power of CDS quotes can be ascribed to recent financial turmoils.

Keywords

Credit default swaps Hierarchical modeling Markov switching models MCMC 

Mathematics Subject Classification

62M05 62P05 91G20 91G40 

References

  1. Armitage S (1995) Event study methods and evidences on their preformance. J Econ Surv 9:25–52CrossRefGoogle Scholar
  2. Avellaneda M, Cont R (2010) Transparency in credit default swap markets. Financ Concepts, JulyGoogle Scholar
  3. BIS (2010) Semiannual OTC derivatives statistics—amounts outstanding of over-the-counter (OTC) derivatives by risk category and instrument. Bank of International SettlementsGoogle Scholar
  4. Castellano R, D’Ecclesia RL (2011) Credit default swaps and rating announcements. J Financ Decis Mak 7:3–19Google Scholar
  5. Castellano R, Scaccia L (2010) A Markov switching re-evaluation of event-study methodology. In: Lechevallier Y, Saporta G (eds) Proceedings of COMPSTAT’2010—19th international conference on computational statistics. Physica-Verlag, Heidelberg, pp 429–436Google Scholar
  6. Frühwirth-Schnatter S (2001) Markov chain Monte Carlo estimation of classical and dynamic switching and mixture models. J Am Stat Assoc 96:194–209CrossRefGoogle Scholar
  7. Gropp R, Richards AJ (2001) Rating agency actions and the pricing of debt and equity of European banks: what can we infer about private sector monitoring of bank soundness? European Central Bank, Working paper no. 76Google Scholar
  8. Hull J, Predescu M, White A (2004) The relationship between credit default swap spreads, bond yields and credit rating announcements. J Bank Financ 28:2789–2811CrossRefGoogle Scholar
  9. ICE (2010) Global credit derivatives market overview: evolution, standardization and clearing. Intercontinental Exchange Creditex. ICE Link. ICE Trust U.S.Google Scholar
  10. Jarrow RA (2010) The economics of credit default swaps. Johnson School research paper series no. 31Google Scholar
  11. Karafiath I, Spencer DE (1991) Statistical inference in multiperiod event studies. Rev Quant Financ Account 1:353–371CrossRefGoogle Scholar
  12. Kliger D, Sarig O (2000) The information value of bond rating. J Financ 55:2879–2902CrossRefGoogle Scholar
  13. Mayordomo S, Peña JI, Schwartz ES (2010) Are all credit default swap databases equal? NBER Working paper series, no 16590Google Scholar
  14. Micu M., Remolona E., Wooldridge P (2006) The price impact of rating announcements: which announcement smatter? BIS working paper, p 207Google Scholar
  15. Norden L, Weber M (2004) Informational efficiency of credit default swap and stock markets: the impact of credit rating announcements. J Bank Financ 28:2813–2843CrossRefGoogle Scholar
  16. Robert CP, Celeux G, Dielbot J (1993) Bayesian estimation of hidden Markov cains: a stochastic implementation. Stat Probab Lett 16:77–83CrossRefGoogle Scholar
  17. Steiner M, Heinke V (2001) Event study concerning international bond price effects of credit rating actions. Int J Financ Econom 6:139–157CrossRefGoogle Scholar

Copyright information

© Springer-Verlag 2012

Authors and Affiliations

  1. 1.Dipartimento di Istituzioni Economiche e Finanziarie, University of MacerataMacerataItaly

Personalised recommendations