The effect of changes in credit rating on CDS spreads: - An empirical study of European companies rated by Standard & Poor´s, Moody´s and Fitch

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A company’s credit default swap spread is the cost per annum for protection against a default by the company. In this paper we investigate the effect of credit rating announcements on the credit default spreads in Europe. We find all announcement types except Downgrade to be statistically significant. The categories On Watch Down and On Watch Up exhibit the most pronounced credit default swap reactions, with average movements of 2.71 percent and 3.01 percent respectively during the announcement day and the day following the announcement. We also find that announcements made by S&P and Moody’s are statistically significant in four out of five announcement categories, whereas no announcements from Fitch are foun...