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Debt rating downgrades of financial institutions: causality tests on single-issue CDS and iTraxx

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  • Olivier Nataf
  • Lieven De Moor

Abstract

This paper analyses the consequences of debt rating downgrades of financial institutions from a novel perspective. Instead of using the traditional event-study framework, our study relies on Granger causality tests performed on three samples of data from the iTraxx index to measure the repercussions of a negative rating change, leading to a twofold conclusion. First, it turned out that low levels of stress lead to unidirectional causality from the entire CDS market to the CDS written on the downgraded company, meaning that market players tend to exert more pressure on companies that are downgraded when the overall situation is calm. Conversely, our study points out that high levels of stress lead to a greater proportion of CDS-to-market causalities and even trigger feedback effects. These two main findings are reinforced by the Student tests and the ordered logistic regressions that are included in the scope of this study.

Suggested Citation

  • Olivier Nataf & Lieven De Moor, 2019. "Debt rating downgrades of financial institutions: causality tests on single-issue CDS and iTraxx," Quantitative Finance, Taylor & Francis Journals, vol. 19(12), pages 1975-1993, December.
    • Handle: RePEc:taf:quantf:v:19:y:2019:i:12:p:1975-1993
    DOI: 10.1080/14697688.2019.1619933
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    Cited by:

    1. Wu, Tao & Gao, Xiangyun & An, Sufang & Liu, Siyao, 2021. "Time-varying pattern causality inference in global stock markets," International Review of Financial Analysis, Elsevier, vol. 77(C).

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