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Do Market-based Indicators Anticipate Rating Agencies? Evidence for International Banks

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  • Antonio Cesare

Abstract

This paper analyses the ability of credit default swap (CDS) spreads, bond spreads and stock prices to anticipate the decisions of the main rating agencies, regarding the largest international banks. Conditional on negative rating events, all the three indicators show significant abnormal changes before both announcements of review and actual credit rating changes, but rating actions still seem to convey new information to the market. Results for positive rating events are less clear-cut with the market indicators generally showing abnormal behaviours only in conjunction with the events. As for the predictive power of the financial indicators examined, the CDS market is particularly useful for negative events and stock prices for positive events. However, all indicators also send many false signals and are to be interpreted with care. Copyright Banca Monte dei Paschi di Siena SpA, 2006

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Bibliographic Info

Article provided by Banca Monte dei Paschi di Siena SpA in its journal Economic Notes.

Volume (Year): 35 (2006)
Issue (Month): 1 (02)
Pages: 121-150

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Handle: RePEc:bla:ecnote:v:35:y:2006:i:1:p:121-150

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  1. Gropp, Reint & Vesala, Jukka & Vulpes, Giuseppe, 2002. "Equity and bond market signals as leading indicators of bank fragility," Working Paper Series 0150, European Central Bank.
  2. Steiner, Manfred & Heinke, Volker G, 2001. "Event Study Concerning International Bond Price Effects of Credit Rating Actions," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 6(2), pages 139-57, April.
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  4. ., 2004. "Market dynamics associated with credit ratings: a literature review," Financial Stability Review, Banque de France, issue 4, pages 77-93, June.
  5. Norden, Lars & Weber, Martin, 2004. "Informational Efficiency of Credit Default Swap and Stock Markets: The Impact of Credit Rating Announcements," CEPR Discussion Papers 4250, C.E.P.R. Discussion Papers.
  6. Hull, John & Predescu, Mirela & White, Alan, 2004. "The relationship between credit default swap spreads, bond yields, and credit rating announcements," Journal of Banking & Finance, Elsevier, vol. 28(11), pages 2789-2811, November.
  7. Norden, Lars & Weber, Martin, 2004. "Informational efficiency of credit default swap and stock markets: The impact of credit rating announcements," Journal of Banking & Finance, Elsevier, vol. 28(11), pages 2813-2843, November.
  8. Arturo Estrella, 1997. "A new measure of fit for equations with dichotomous dependent variables," Research Paper 9716, Federal Reserve Bank of New York.
  9. Hand, John R M & Holthausen, Robert W & Leftwich, Richard W, 1992. " The Effect of Bond Rating Agency Announcements on Bond and Stock Prices," Journal of Finance, American Finance Association, vol. 47(2), pages 733-52, June.
  10. Pinches, George E & Singleton, J Clay, 1978. "The Adjustment of Stock Prices to Bond Rating Changes," Journal of Finance, American Finance Association, vol. 33(1), pages 29-44, March.
  11. Gonzalez, F. & Haas, F. & Johannes, R. & Persson, M. & Toledo, L. & Violi, R. & Zins, C. & Wieland, M., 2004. "Market dynamics associated with credit ratings: a literature review," Financial Stability Review, Banque de France, issue 4, pages 53-76, June.
  12. Holthausen, Robert W. & Leftwich, Richard W., 1986. "The effect of bond rating changes on common stock prices," Journal of Financial Economics, Elsevier, vol. 17(1), pages 57-89, September.
  13. Grier, Paul & Katz, Steven, 1976. "The Differential Effects of Bond Rating Changes among Industrial and Public Utility Bonds by Maturity," The Journal of Business, University of Chicago Press, vol. 49(2), pages 226-39, April.
  14. Goh, Jeremy C. & Ederington, Louis H., 1999. "Cross-sectional variation in the stock market reaction to bond rating changes," The Quarterly Review of Economics and Finance, Elsevier, vol. 39(1), pages 101-112.
  15. Doron Kliger & Oded Sarig, 2000. "The Information Value of Bond Ratings," Journal of Finance, American Finance Association, vol. 55(6), pages 2879-2902, December.
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Cited by:
  1. Sarai Criado & Adrian van Rixtel, 2008. "Structured finance and the financial turmoil of 2007-2008: and introductory overview," Banco de Espa�a Occasional Papers 0808, Banco de Espa�a.
  2. Ansgar Belke & Christian Gokus, 2011. "Volatility Patterns of CDS, Bond and Stock Markets before and during the Financial Crisis: Evidence from Major Financial Institutions," Discussion Papers of DIW Berlin 1107, DIW Berlin, German Institute for Economic Research.
  3. Imbierowicz, Björn & Wahrenburg, Mark, 2013. "Wealth transfer effects between stockholders and bondholders," The Quarterly Review of Economics and Finance, Elsevier, vol. 53(1), pages 23-43.
  4. Bruder, Benjamin & Hereil, Pierre & Roncalli, Thierry, 2011. "Managing sovereign credit risk in bond portfolios," MPRA Paper 36673, University Library of Munich, Germany.

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