Do Sovereign Credit Ratings Reduce Information Asymmetry? Evidence from CDS Markets
Do Sovereign Credit Ratings Reduce Information Asymmetry? Evidence from CDS Markets

Author(s): Radostina Stamenova, Vanina Yurieva
Subject(s): Economy, National Economy, Supranational / Global Economy, Financial Markets
Published by: Университет за национално и световно стопанство (УНСС)
Keywords: sovereign credit ratings; information asymmetry; CDS spreads; panel data
Summary/Abstract: This study examines the informational value of sovereign credit ratings in the pricing of sovereign risk. Using a balanced panel of 53 advanced and emerging economies over the period 2012 – 2024, the empirical analysis combines fixed-effects panel regressions and Granger causality tests to assess whether rating actions influence sovereign credit default swap (CDS) spreads. Regression results confirm the significant impact of rating changes on CDS spreads, however, with asymmetry in market reactions. While rating downgrades are found to be positively associated with increases in CDS spreads, upgrades exhibit no statistically significant impact. Importantly, Granger causality tests indicate that rating actions precede movements in CDS spreads, rather than the reverse. These findings suggest that sovereign ratings continue to function as relevant informational and coordinating signals, despite the reputational setbacks experienced by credit rating agencies during recent financial crises.

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