Rating Announcements, CDS Spread and Volatility During the European Sovereign Crisis

Philippe Raimbourg (1, 2) , Federica Salvadè (3)

1 UP1 - Université Paris 1 Panthéon-Sorbonne
2 PRISM Sorbonne - Pôle de recherche interdisciplinaire en sciences du management
3 PSB - Paris School of Business

This paper analyzes the evolution of CDS spread and CDS volatility around European sovereign rating announcements over the period 2008-13. We show that the effect of the announcement differs depending on the credit quality of the issuer (Investment Grade versus Speculative). The downgrading and negative credit watch of an investment grade country stabilize the market, as volatility decreases right after their release. By contrast, the announcements regarding speculative grade countries trigger an increase in both CDS spread and volatility. Lastly, we show that these announcements not only affect the CDS of the country, but spill over the German CDS.

Keywords: Credit default swap; Financial crisis; Sovereign rating announcements; Volatility

Domains: Humanities and Social Sciences; Economics and Finance

Philippe Raimbourg, Federica Salvadè. Rating Announcements, CDS Spread and Volatility During the European Sovereign Crisis. Finance Research Letters, 2021, 40, pp.101663. ⟨10.1016/j.frl.2020.101663⟩. ⟨hal-04011022⟩