Impact of Credit Rating Announcements on CDS Market in Developed and Developing Countries

This research focuses on the analysis of developed and emerging countries’ credit rating announcements’ influence on sovereign credit default swap market from 01.01.2009 up to 01.01.2017 considering Moody’s rating scale. By using event study methodology and performing t-tests for mean abnormal returns and cumulative abnormal returns at time periods surrounding the event some patterns are captured and reported. Downgrades’ influence is found to be significant in both developed and emerging countries, while upgrades have weakly significant impact (and highly significant impact if preceded by positive watch) only on emerging countries’ sovereign credit default swaps. Downgrades preceded by negative outlook are found to be anticipated by credit default swap market before the announcement in developed countries, but in emerging countries this trend is not revealed. Negative and positive outlook and watch announcements are found to cause at least weakly significant abnormal returns on sovereign credit default swaps only in developed countries. Also the findings provide evidence that abnormal returns caused by downgrades from Aaa/Aa1 rating and from lower than Aa1 ratings within investment grade are weakly significant at event day. Downgrades that cause change from investment to speculative grade are found to bring about higher abnormal returns than downgrades within one grade on event day considering events from developed and emerging countries together.