Zusammenfassung: | Rating agencies play a major role in the world financial markets by assessing the creditworthiness of corporates and sovereigns. They are supposed to introduce new, private information to the market, thus mitigating the problems caused by asymmetric information. We analyze how much of the information from rating events can be retrieved through the heterogeneous development of CDS spreads. We also study the other direction of the impacts of rating announcements and other observable covariates on credit spreads. By the use of a reduction model we gain insights into the pricing of credit spreads by focusing on the role of credit announcements from the three major rating agencies: S&P, Moody's and Fitch.
The dynamics of CDS spread developments of European corporates and sovereigns indicate different magnitudes of predictability of credit rating events. We conclude that the CDS spread volatility is a better predictor for negative rating announcements than simple CDS spread level changes, especially in the sovereign and the financial sectors. The results can be explained by the degree of heterogeneity and information asymmetry in different sectors.
In a study on the pricing of CDS contracts in the European market, we use the credit rating as an independent variable in the model of Doshi, Jacobs, Ericsson and Turnbull (2013). Our results emphasize the importance of credit rating announcements in the pricing of CDS contracts, an element that many market participants have questioned in light of the sub-prime and sovereign-debt crises. The results of the risk-neutral to physical default probability ratios are in line with Cvitanić et al. (2011), who explain that heterogeneity leads to time- and state-varying levels of risk aversion, optimism and patience at an aggregate level.
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