The Information Content of Ratings: An Analysis of Australian Credit Default Swap Spreads

20 Pages Posted: 11 Mar 2014

See all articles by Jue Wang

Jue Wang

University of Sydney Business School

Jiri Svec

The University of Sydney - Discipline of Finance

Maurice Peat

The University of Sydney; Financial Research Network (FIRN)

Date Written: March 2014

Abstract

We examine the information content of Australian credit rating announcements by measuring the abnormal changes in credit default swap (CDS) spreads. CDS spreads provide a direct view of credit quality and thus should impound information quickly when investors receive new credit risk related information via a rating event. Using an event study methodology, we show that watch downs and rating upgrades contain valuable information even after controlling for sources of contamination. We find that watch downs elicit statistically significant market reactions, while subsequent downgrades are anticipated. Upgrades are associated with a significant but small abnormal reduction in CDS spreads, whereas watch ups appear to contain no new information.

Keywords: Credit default swaps, Credit ratings, Emerging market, Event study, Market reaction

Suggested Citation

Wang, Jue and Svec, Jiri and Peat, Maurice, The Information Content of Ratings: An Analysis of Australian Credit Default Swap Spreads (March 2014). Abacus, Vol. 50, Issue 1, pp. 56-75, 2014, Available at SSRN: https://ssrn.com/abstract=2407226 or http://dx.doi.org/10.1111/abac.12022

Jue Wang (Contact Author)

University of Sydney Business School ( email )

Cnr. of Codrington and Rose Streets
Sydney, NSW 2006
Australia

Jiri Svec

The University of Sydney - Discipline of Finance ( email )

P.O. Box H58
Sydney, NSW 2006
Australia
+61 2 9036 6241 (Phone)

Maurice Peat

The University of Sydney ( email )

University of Sydney
Sydney, NSW 2006
Australia

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

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