Revaluating Firm Credit Risk – the Impact of the Rating Review Process on Credit Markets
This paper analyzes the CDS spread performance during the time a firm's credit rating is under review. We test whether rating agencies still take on a monitoring type role in financial markets and whether this monitoring offers an economic value-adding element if it is successful. We document that reviews for downgrade which eventually result in a downgrade lead to CDS spread increases during the time the rating is on review, whereas rating affirmations lead to a persisting reduction in spread levels. These results underline the importance of monitoring by rating agencies for credit risk valuations.
Area: Risk management
Keywords: Credit Rating Agencies, Credit Rating Review, Monitoring, Credit Default Swap
