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Rating downgrade and the price impact of CDS spread on stock return

Chng, Michael T. and Wang, Peipei 2014, Rating downgrade and the price impact of CDS spread on stock return, Review of futures markets, vol. 21, no. 3, pp. 283-323.

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Title Rating downgrade and the price impact of CDS spread on stock return
Author(s) Chng, Michael T.
Wang, Peipei
Journal name Review of futures markets
Volume number 21
Issue number 3
Start page 283
End page 323
Total pages 41
Publisher Kent State University
Place of publication Chicago, IL
Publication date 2014
ISSN 0898-011X
Keyword(s) CDS spreads
credit rating
stock returns
Summary We investigate the time-varying informativeness of credit default swap (CDS) trading on stock returns for 302 US firms from July 2004 to August 2010. Using the Acharya and Johnson (2007) measure, we find that CDS trading becomes informative for an increasing number of firms as we approach the global financial crisis (GFC). Firm numbers gradually decline post-GFC, but remain high compared to the pre-GFC period. furthermore, CDS trading imposes the largest conditional price impact on firms that are recently downgraded, regardless of rating levels. Interestingly, this holds during and after the GFC, but not before. We offer two implications. First, despite post-GFC outcry against the CDS market, our results suggest it exhibits enhanced price discovery during the GFC. Second, our findings support criticism that, in the lead-up to the GFC, rating agencies are slow in downgrading firms. However, if downgrade decisions made during and after the GFC induce informed trading in the CDS market, this necessarily implies that during the midst of the GFC, rating agencies have got their act together.
Language eng
Field of Research 150205 Investment and Risk Management
Socio Economic Objective 900102
HERDC Research category C1 Refereed article in a scholarly journal
Copyright notice ©2014, Kent State University
Persistent URL http://hdl.handle.net/10536/DRO/DU:30061932

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Every reasonable effort has been made to ensure that permission has been obtained for items included in DRO. If you believe that your rights have been infringed by this repository, please contact drosupport@deakin.edu.au.