scholarly journals CDS Momentum: Slow-Moving Credit Ratings and Cross-Market Spillovers

2021 ◽  
Author(s):  
Jongsub Lee ◽  
Andy Naranjo ◽  
Stace Sirmans
Keyword(s):  
Credit Rating ◽  
Credit Ratings ◽  
Credit Default Swap ◽  
Momentum Strategies ◽  
Information Efficiency ◽  
Market Effects ◽  
Credit Default ◽  
Slow Moving ◽  
Default Swap ◽  
Rating Changes

Abstract This paper highlights the adverse consequences of sluggish credit rating updates in creating information efficiency distortions and investment anomalies. We first document significant credit default swap (CDS) return momentum yielding 7.1% per year. We further show that cross-market momentum strategies based on information in past CDS performance generates an alpha of 10.3% per year in stocks and 7.3% per year in bonds. These CDS momentum and cross-market effects are stronger among more liquid, informationally rich CDS contracts whose CDS spreads move in anticipation of important, yet slow-moving, credit rating changes.

CDS spreads as an independent measure of credit risk

2017 ◽  
Vol 18 (2) ◽  
pp. 122-144 ◽  
Author(s):  
Florian Kiesel ◽  
Jonathan Spohnholtz
Keyword(s):  
Trading Volume ◽  
Credit Rating ◽  
Credit Ratings ◽  
Credit Default Swap ◽  
Content Type ◽  
Rating Agencies ◽  
Market Participants ◽  
Credit Default ◽  
Market Factors ◽  
Rating Changes

Purpose The creditworthiness of corporates is most visible in credit ratings. This paper aims to present an alternative credit rating measure independently of credit rating agencies. The credit rating score (CRS) is based on the credit default swap (CDS) market trading. Design/methodology/approach A CRS is developed which is a linear function of logarithmized CDS spreads. This new CRS is the first one that is completely independent of the rating agency. The estimated ratings are compared with ratings provided by Fitch Ratings for 310 European and US non-financial corporates. Findings The empirical analysis shows that logarithmized CDS spreads and issuer credit ratings by agencies have a linear relationship. The new CRS provides market participants with an alternative risk assessment, which is solely based on market factors, and does not rely on credit rating analysts. The results indicate that our CRS is able to anticipate agency ratings in advance. Moreover, the analysis shows that the trading volume has only a limited influence in the anticipation of rating changes. Originality/value This study shows a new approach to measure the creditworthiness of firms by analyzing CDS spreads. This is highly relevant for regulation, firm monitoring and investors.

Credit risk signals in CDS market vs agency ratings

2016 ◽  
Vol 17 (2) ◽  
pp. 194-217 ◽  
Author(s):  
Michael Jacobs Jr ◽  
Ahmet K. Karagozoglu ◽  
Dina Naples Layish
Keyword(s):  
Credit Risk ◽  
Credit Rating ◽  
Credit Ratings ◽  
Credit Default Swap ◽  
Risk Assessments ◽  
Content Type ◽  
Rating Agencies ◽  
Market Participants ◽  
Credit Default ◽  
The Relationship

Purpose This research aims to model the relationship between the credit risk signals in the credit default swap (CDS) market and agency credit ratings, and determines the factors that help explain the variation in such signals. Design/methodology/approach A comprehensive analysis of the differences in the relative credit risk assessments of CDS-based risk signals and agency ratings is provided. It is shown that the divergence between credit risk signals in the CDS market and agency ratings is explained by factors which the rating agencies may consider differently than credit market participants. Findings The results suggest that agency credit ratings of relative riskiness of a reference entity do not always correspond with assessments by CDS spreads, as the price of risk is a function of additional macro and micro factors that can be explained using statistical analysis. Originality/value This research is unique in modeling the relationship between the credit risk assessments of the CDS market and the agency ratings, which to the best of the authors' knowledge has not been analyzed before in terms of their agreement and the level of discrepancy between them. This model can be used by investors in debt instruments that are not explicitly CDSs or which have illiquid CDS contracts, to replicate market-based, point-in-time credit risk signals. Based on both market-based and firm-specific factors in this model, the results can be used to augment through-the-cycle credit risk assessments, analyze issues surrounding the pricing of CDSs and examine the policies of credit rating agencies.

scholarly journals A Simulation Model for Pricing the Spread in a Credit Default Swap: Application and Analysis#

2018 ◽  
Vol 9 (2) ◽  
pp. 9
Author(s):  
Madhvi Sethi ◽  
Parthiv Thakkar ◽  
Zahid M. Jamal
Keyword(s):  
Simulation Model ◽  
Credit Ratings ◽  
Credit Default Swap ◽  
Pricing Model ◽  
Underlying Asset ◽  
True Value ◽  
Credit Default ◽  
Default Swap ◽  
Credit Event

This paper explores pricing the contract of a Credit Default Swap (CDS) using a simulation model. It attempts to determine the spread value which is a periodic payment to be made by the protection buyer. It also helps in identifying the factors that should be taken into account to determine the true value of the payment which would hedge the risk in case of a credit event by the issuer of the underlying asset. The paper uses the Hull and White pricing model for creating the simulation model. This model is then applied to analyse CDSs of countries having different credit ratings. The paper using the model analyses the actual and estimated spread of the different countries and discusses the possible reasons for the same.<ins cite="mailto:Windows%20User" datetime="2018-01-07T00:55"> </ins>

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