The influence of sovereign credit ratings on sovereign credit default swaps: do splits matter?

• Main Authors: Lim, K.-T., Goh, Kim Leng, Kwek, Kian Teng
• Format: Article
• Published: Economics Bulletin 2021
• Subjects: H Social Sciences (General); Business cycles. Economic fluctuations; HD28 Management. Industrial Management
• Online Access: http://eprints.um.edu.my/36138/; https://www.scopus.com/inward/record.uri?eid=2-s2.0-85125247711&partnerID=40&md5=6aef0d9452f0eb5d6252434d22c66c8b

This paper compares the influence of sovereign credit ratings (SCRs) issue by three credit rating agencies (CRAs) on sovereign credit default swaps (SCDSs) that is adopted as a proxy for debt pricing. The sample covers quarterly observations from 2008 to 2020 for 32 countries that were graded by all the three CRAs. The generalized methods of moment based on forward orthogonal deviation transformation is used for estimation. During the period 2008-2011 when a divergence in the SCRs issued by the three CRAs was apparent, the SCRs were relevant for pricing of the SCDSs. The influence of the SCRs issued by Fitch and the combination of Fitch and Moody's on SCDSs is the largest. This indicates a market preference for the SCRs issued by specific CRAs and the splits in creditworthiness opinions matter for debt pricing. On the contrary, when such splits are almost negligible in the period 2012-2020, the convergence in the SCRs issued by the different CRAs did not have the expected influence on SCDSs. This calls for further investigation into the influence of non-sovereign risk factors on debt pricing © 2021, Economics Bulletin.All Rights Reserved.