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

  • Antonio Cesare

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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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. 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.
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