Good News, Bad News and Rating Announcements: An Empirical Investigation
54 Pages Posted: 17 Feb 2009 Last revised: 12 Apr 2011
Date Written: April 5, 2011
Abstract
In this paper we employ a new approach to test the contribution of information in rating announcements. This is the first study to test and corroborate how the CDS market responds to rating actions after controlling for the presence of concurrent public and private information. We show that since the clustering of rating announcements characterizes economically significant developments, the common practice of using “uncontaminated” samples underestimates market response. As in previous studies, we find that the market response to bad news is stronger than to good news. Nevertheless, bad news and negative rating announcements tend to cluster. Therefore, the residual contribution of negative rating announcements is small and in some cases insignificant. Positive rating announcements are less frequent and less clustered, though their residual contribution is still significant.
Keywords: Credit Default Swaps, Credit Risk, Credit Rating
JEL Classification: G14, G24, D8
Suggested Citation: Suggested Citation
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