Do Credit Default Swaps Mitigate the Impact of Credit Rating Downgrades?*

This article is concerned with the arbitrage-free valuation of bilateral counterparty risk through stochastic dynamical models when collateral is included, with possible rehypothecation. The payout of claims is modified to account for collateral margining in agreement with International Swap and Derivatives Association (ISDA) documentation. The analysis is specialized to interest-rate and credit derivatives. In particular, credit default swaps are considered to show that a perfect collateralization cannot be achieved under default correlation. Interest rate and credit spread volatilities are fully accounted for, as is the impact of re-hypothecation, collateral margining frequency, and dependencies.

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The Impact of Corporate Social Responsibility on the Spreads of Credit Default Swaps

SSRN Electronic Journal ◽

10.2139/ssrn.3179468 ◽

2018 ◽

Author(s):

Florian Barth

Keyword(s):

Corporate Social Responsibility ◽

Social Responsibility ◽

Credit Default Swaps ◽

Credit Default ◽

Corporate Social ◽

The Impact

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The Impact of Earnings on the Pricing of Credit Default Swaps

The Accounting Review ◽

10.2308/accr.2009.84.5.1363 ◽

2009 ◽

Vol 84 (5) ◽

pp. 1363-1394 ◽

Cited By ~ 100

Author(s):

Jeffrey L. Callen ◽

Joshua Livnat ◽

Dan Segal

Keyword(s):

Default Risk ◽

Credit Default Swap ◽

Credit Default Swaps ◽

Cash Flows ◽

Earnings Surprises ◽

Credit Default ◽

Percent Increase ◽

Default Swap ◽

Highly Correlated ◽

The Impact

ABSTRACT: This study evaluates the impact of earnings on credit risk in the Credit Default Swap (CDS) market using levels, changes, and event study analyses. We find that earnings (cash flows, accruals) of reference firms are negatively and significantly correlated with the level of CDS premia, consistent with earnings (cash flows, accruals) conveying information about default risk. Based on the changes analysis, a 1 percent increase in ROA decreases CDS rates significantly by about 5 percent. We also find that (1) CDS premia are more highly correlated with below-median earnings than with above-median earnings and (2) CDS premia are more highly correlated with earnings of low-rated firms than with earnings of high-rated firms. Evidence indicates further that short-window earnings surprises are negatively and significantly correlated with CDS premia changes in the three-day window surrounding the preliminary earnings announcement, although the impact is concentrated in the shorter maturities.

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Credit Default Swaps and Debt Overhang

Management Science ◽

10.1287/mnsc.2020.3953 ◽

2021 ◽

Author(s):

Tak-Yuen Wong ◽

Jin Yu

Keyword(s):

Cross Sections ◽

Firm Value ◽

Real Option ◽

Credit Default Swaps ◽

Equity Returns ◽

Negative Effects ◽

Debt Overhang ◽

Credit Default ◽

Asset Growth ◽

The Impact

We analyze the impact of credit default swaps (CDSs) trading on firm investment, long-term debt financing, and valuation. In our model, the firm is endowed with a real option to initiate a project and enhance its future growth. Its creditors have access to CDS contracts that hedge them against default losses. We show that CDS protection increases the firm’s pledgable income: that is, the maximum amount of debt it can raise. However, at the same time CDS protection decreases asset growth and impedes project initiation. As a result, CDS trading could reduce firm value, and the negative effects are stronger when the firm is riskier, where shareholders have stronger bargaining power, and growth opportunities are less valuable. Using simulated cross-sections of firms, we find that CDS trading increases corporate default rates and deters investment. Altogether, CDS firms tend to have a lower firm value and more volatile equity returns than non-CDS firms. This paper was accepted by Gustavo Manso, finance.

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The impact of market sectors and rating agencies on credit ratings: global evidence

The Journal of Risk Finance ◽

10.1108/jrf-09-2017-0145 ◽

2019 ◽

Vol 20 (5) ◽

pp. 389-410

Author(s):

Kerstin Lopatta ◽

Magdalena Tchikov ◽

Finn Marten Körner

Keyword(s):

Credit Risk ◽

Credit Rating ◽

Credit Ratings ◽

Content Type ◽

Rating Agencies ◽

Credit Rating Agency ◽

Rating Agency ◽

Investment Grade ◽

The Impact ◽

Rating Downgrades

Purpose A credit rating, as a single indicator on one consistent scale, is designed as an objective and comparable measure within a credit rating agency (CRA). While research focuses mainly on the comparability of ratings between agencies, this paper additionally questions empirically how CRAs meet their promise of providing a consistent assessment of credit risk for issuers within and between market segments of the same agency. Design/methodology/approach Exhaustive and robust regression analyses are run to assess the impact of market sectors and rating agencies on credit ratings. The examinations consider the rating level, as well as rating downgrades as a further measure of empirical credit risk. Data stems from a large global sample of Bloomberg ratings from 11 market sectors for the period 2010-2018. Findings The analyses show differing effects of sectors and agencies on issuer ratings and downgrade probabilities. Empirical results on credit ratings and rating downgrades can then be attributed to investment grade and non-investment grade ratings. Originality/value The paper contributes to current finance research and practice by examining the credit rating differences between sectors and agencies and providing assistance to investors and other stakeholders, as well as researchers, how issuers’ sector and rating agency affiliations act as relative metrics.

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