Corporate creditworthiness proxies: credit ratings and CDS spreads

This thesis is addressed to determine which indicator of corporate creditworthiness reflectsfastera change of thecredit risk:credit ratingsor credit default swapspreads.To analyse this issue, this paper conducts an event studythatincludesrating publicationsfrom S&P and Moody’s and CDS spreads ofU.S. corporates during the years2004-2018.The findingsrevealthat the CDS market cananticipate rating events, however, CDSspreads still respondto rating announcements. Moreover,results exhibitthat the level of responseis higher after announcementsthat worsen the issuer’s rating, compared to those publications that improve its rating, and after rating events that place the issuer in the other side of the investment/speculative grade.Also, this paper observeslack of response towards rating announcementsthat have been precededby a negative review, suggesting full spreadincorporation of the information contained in these announcements.In addition, this thesisexamines the different response of the CDS market to rating eventsbefore, during and after the Great Recession toconclude that rating announcements’impact on the CDS spreadhas diminished considerably in the post-crisisperiod.Furthermore,byapplying a logisticregression methodology this research discoversthat the CDSmarket can also predict most of therating announcementstypes.