The impact and the spillover effect of a sovereign rating announcement on the euro area CDS market

Drago, Danilo; Gallo, Raffaele

doi:10.1016/j.jimonfin.2016.06.004

Cited by 46 publications

(39 citation statements)

References 37 publications

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“…The above developments have contributed to a burgeoning academic literature which studies the impact of rating actions (e.g. Baum et al, 2016;Böninghausen and Zabel, 2015;Caselli et al, 2016;Chen et al, 2016;Drago and Gallo, 2016). 2 This recent literature has addressed a number of angles on the impact of CRA sovereign and corporate rating actions on economies and financial markets.…”

Section: Introductionmentioning

confidence: 99%

“…Several closely related papers only use one CRA's data hence are unable to account for this effect in any way (e.g. Chen et al, 2016;Drago and Gallo, 2016;Wengner et al, 2015). Relating to the quantification of split ratings, most prior papers ignore outlook and watch actions, which have been demonstrated to be a crucial component of the information content of CRA actions (e.g.…”

Section: Introductionmentioning

confidence: 99%

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The influence of rating levels and rating convergence on the spillover effects of sovereign credit actions

Romero

Alsakka

Gwilym

2018

Journal of International Money and Finance

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Peer reviewed versionCyswllt i'r cyhoeddiad / Link to publication Dyfyniad o'r fersiwn a gyhoeddwyd / Citation for published version (APA): Abad, P., Alsakka, R., & ap Gwilym, O. (2018). The influence of rating levels and rating convergence on the spillover effects of sovereign credit actions. Journal of International Money and Finance, 85, 40-57. https://doi. AbstractThis paper assesses contagion and competition as alternative types of stock market spillovers arising from sovereign rating actions. Our research design is based on the premise that the type of spillover effects within and between groups of countries will be influenced by the sovereign rating level, split ratings and the extent of rating convergence i.e. specific types of rating action will induce different and/or stronger effects. The results reveal a clear pattern whereby downgrades of high-rated countries induce contagion to both high and low-rated countries, while downgrades of low-rated countries reveal the opposite i.e. they induce competitive effects. Split ratings are found to intensify stock market spillover effects. Rating convergence/divergence across similarly-rated sovereigns has a meaningful influence on the spillover effects. For the downgrades of high-rated countries, rating convergence mitigates the contagion effect to other high-rated countries in the region, but has very limited effect on the contagion to low-rated countries. For downgrades of low-rated countries, rating convergence strengthens the competitive effect on other low-rated countries but has little effect on the competitive impact on high-rated countries.JEL classification: G11, G14, G15.

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Section: Introductionmentioning

confidence: 99%

Section: Introductionmentioning

confidence: 99%

The influence of rating levels and rating convergence on the spillover effects of sovereign credit actions

Romero

Alsakka

Gwilym

2018

Journal of International Money and Finance

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“…Consistent with related works that adopted an event study to analyze the CDS market(Drago & Gallo, 2016;Micu, Remolona, & Wooldridge, 2006), we assume that CDS returns are more sensitive to changes in CDS spreads than to changes in other variables. Consistent with related works that adopted an event study to analyze the CDS market(Drago & Gallo, 2016;Micu, Remolona, & Wooldridge, 2006), we assume that CDS returns are more sensitive to changes in CDS spreads than to changes in other variables.…”

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confidence: 99%

“…However, we obtain qualitatively similar results by adopting 10-year CDS spreads.4 In the multivariate analysis (Section 5), we investigate the impact on a larger time window, and we include all CSR rating announcements.5 The present value of a CDS contract is affected by changes in spreads, interest, and recovery rates. Consistent with related works that adopted an event study to analyze the CDS market(Drago & Gallo, 2016;Micu, Remolona, & Wooldridge, 2006), we assume that CDS returns are more sensitive to changes in CDS spreads than to changes in other variables. This hypothesis seems reasonable for short time intervals, such as 1 day.…”

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confidence: 99%

Do corporate social responsibility ratings affect credit default swap spreads?

Drago

Carnevale

Gallo

2018

Corp Soc Responsibility Env

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We examine the impact of a corporate social responsibility (CSR) rating announcement on the credit default swap (CDS) spreads of European firms. Our results indicate that a CSR rating upgrade leads to an immediate and significant decrease in CDS spreads of rated firms. In contrast, CSR rating downgrades do not have a significant immediate impact on the CDS market. Additionally, better CSR ratings, in terms of both the overall score and the scores for the three main CSR pillars (economic, environmental, and social), lead to lower CDS spreads. Therefore, we document that the CSR rating is a measure of CSR performance that affects market CDS prices. Our findings are consistent with the risk mitigation view, highlighting the benefits derived from CSR commitment. Consequently, CSR engagement can function as a tool for improving firm's creditworthiness. This result may provide an incentive to pay more attention to CSR in managerial, regulatory, and investment decisions.

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“…Drago and Gallo [9] analyzed the impact of sovereign ratings announcements on the CDS market. The study concluded that agency warnings had zero to little impact on the CDS market.…”

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confidence: 99%

Innovative approach to the management of credit risk

Budinský¹,

Bezvoda²

2018

MMI

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INNOVATIVE APPROACH TO THE MANAGEMENT OF CREDIT RISK 1Credit rating is a traditional measurement of credit risk in financial markets. This paper introduces an innovative approach based on implied ratings defined by CDS spreads. Using this approach the credit risk can be better managed because CDS are provided on daily basis. The implied rating is compared with credit ratings provided by Moody´s, S&P, and Fitch. The model of implied rating deals only with sovereign ratings. 52 countries were chosen for comparison of both types of above-mentioned ratings. The model uses cumulative default probabilities (CPD) derived from CDS spreads and the main results are CPD intervals which define implied credit ratings. For those countries where the credit rating and implied credit rating are different, the paper shows how implied rating can serve as a signal for potential upgrade or downgrade of the credit rating provided by rating agencies. The presented model is also used to verify ratings provided by Moody´s, S&P, and Fitch in cases where these agencies provide different ratings for a specific country. This is especially important when some ratings are investment-grade and others are speculative-grade.

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The impact and the spillover effect of a sovereign rating announcement on the euro area CDS market

Cited by 46 publications

References 37 publications

The influence of rating levels and rating convergence on the spillover effects of sovereign credit actions

The influence of rating levels and rating convergence on the spillover effects of sovereign credit actions

Do corporate social responsibility ratings affect credit default swap spreads?

Innovative approach to the management of credit risk

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