Credit rating impact on the CDS market: the case of PIIGS countries coving European debt crisis period

Abstract: In this paper, I analyze the impact of sovereign debt rating to CDS market under PIIGS (Portugal, Italy, Ireland, Greece and Spain) context during the European Debt Crisis. Via panel regression, I find country's sovereign rating and outlook have significant impact on the CDS market during the pre-crisis period. Rating announcements have a less significant effect compared to outlook adjustments. S&P is the most accurate and reliable one among the big three credit rating agencies. Furthermore, we conclude that crisis has paralyzed the credit rating agencies' ability to provide rating accurately and promptly. Then through event study, we observe a negative impact on the CDS market from the rating announcement in both upgrading and downgrading events. Downgrading events tend to have bigger impact on the CDS market compared to the upgrading events, in terms of the cumulative abnormal return that captured in the event window and the lasting effect on the market after the event date.