The impact of credit rating announcements on bond and CDS markets in Europe

The purpose of this thesis is to investigate the impact of credit rating announcements on bond spreads, CDS spreads and CDS basis in Europe. The impact of rating announcements is analyzed for 20 European countries. The data sample begins 30.12.1994 and ends 11.2.2015. This thesis studies the subject from three aspects. Firstly, do the credit rating announcements have an impact on bond and CDS markets? Secondly, can bond and CDS markets anticipate the future credit rating changes? Thirdly, has the impact of credit rating announcements changed before and after the Lehman Brothers’ bankruptcy? Additionally the CDS basis is used to study the mispricing between bond and CDS markets. A fixed effects panel data regression is used for the analysis. The results for the first analysis show that the bond and CDS markets are not totally efficient. As the previous studies have proven, in general, the negative credit rating announcements have an impact on bond and CDS markets. The bond market is able to anticipate rating changes from S&P and Fitch and negative revisions from Moody’s. The CDS market is able to anticipate most of the negative announcements. The CDS basis shows some mispricing between these two markets in a 30 day window before the announcements. These results indicate that the rating agencies still have a significant role for investors in Europe. The market is able to anticipate the future rating changes, but there is still a large correction in prices around the rating announcement. CDS basis analysis shows that the pricing between bond and CDS markets is effective around the rating announcements.fi=Opinnäytetyö kokotekstinä PDF-muodossa.|en=Thesis fulltext in PDF format.|sv=Lärdomsprov tillgängligt som fulltext i PDF-format