On the Relationship between Credit Rating Announcements and Credit Default Swap Spreads for European Reference Entities

Previous research suggests that credit rating announcements by Moody’s are anticipated by participants in the credit default swap market. In particular, it is argued that downgrades and negative outlook reports do not contain significant information, but there seems to be anticipation of both types of ratings announcements. In this paper, we examine credit default swap spread changes conditional on a ratings announcement for European reference entities. For our sample of J.P. Morgan Trak-X Europe companies, we find evidence that downgrades and negative outlooks do contain significant information, but find no evidence that announcements are anticipated by participants in the credit default swap market. Additionally, we find evidence that CDS spreads initially do not fully adjust to the information in positive or stable outlook reports resulting in significant post-announcement day effects.