The Relationship Between Credit Default Swap Spreads, Bond Yields, and Credit Rating Announcements
Abstract: A company's credit default swap spread is the cost per annum for protection against a default by the company. In this paper we analyze data on credit default swap spreads collected by a credit derivatives broker. We first examine the relationship between credit default spreads and bond yields and reach conclusions on the benchmark risk-free rate used by participants in the credit derivatives market. We then carry out a series of tests to explore the extent to which credit rating announcements by Moody's are anticipated by participants in the credit default swap market.
Published in: Journal of Banking & Finance, Vol. 28, No. 11, (November 2004), pp. 2789-2811.