XXV Edition

1-2 December 2016"

Revaluating Firm Credit Risk – the Impact of the Rating Review Process on Credit Markets

Florian Kiesel, Technical University of Darmstadt
Sascha Kolaric, Technical University of Darmstadt
Dirk Schiereck, Technical University of Darmstadt

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

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