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The reaction of European credit default swap spreads to the U.S. credit rating downgrade

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  • Blau, Benjamin M.
  • Roseman, Brian S.

Abstract

Using data consisting of Credit Default Swap (CDS) spreads, this study examines CDS spreads for nearly all European countries surrounding the August 5th, 2011 sovereign credit rating downgrade of the United States. While U.S. CDS spreads remained at relatively normal levels, we find a surge in European CDS spreads during the ten-day period surrounding the U.S. downgrade. At their highest level during this ten-day period, CDS spreads were nearly 25% higher than normal indicating that the CDS market perceived that the U.S. downgrade dramatically affected the likelihood of default in European countries. We show that European countries with the smallest GDP per capita and countries that had not recently been downgraded had the largest increase in CDS spreads. Our multivariate tests also show that countries that use the EURO also had the largest increases in CDS spreads.

Suggested Citation

  • Blau, Benjamin M. & Roseman, Brian S., 2014. "The reaction of European credit default swap spreads to the U.S. credit rating downgrade," International Review of Economics & Finance, Elsevier, vol. 34(C), pages 131-141.
  • Handle: RePEc:eee:reveco:v:34:y:2014:i:c:p:131-141
    DOI: 10.1016/j.iref.2014.07.009
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    References listed on IDEAS

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    Cited by:

    1. Arakelyan, Armen & Rubio, Gonzalo & Serrano, Pedro, 2015. "The reward for trading illiquid maturities in credit default swap markets," International Review of Economics & Finance, Elsevier, vol. 39(C), pages 376-389.
    2. Hassan, Kamrul & Hoque, Ariful & Gasbarro, Dominic, 2017. "Sovereign default risk linkage: Implication for portfolio diversification," Pacific-Basin Finance Journal, Elsevier, vol. 41(C), pages 1-16.
    3. Lahiani, Amine & Hammoudeh, Shawkat & Gupta, Rangan, 2016. "Linkages between financial sector CDS spreads and macroeconomic influence in a nonlinear setting," International Review of Economics & Finance, Elsevier, vol. 43(C), pages 443-456.
    4. Cumhur ÞAHÝN & Hüseyin ALTAY, 2016. "Examination of the Relationship between Turkey’s Credit Default Swap (CDS) Points and Unemployment," Eurasian Business & Economics Journal, Eurasian Academy Of Sciences, vol. 4(4), pages 52-67, January.

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