Abstract
This article investigates empirically the relationship between credit spreads and credit default swap spreads and how these spreads react to changes in credit ratings. The authors’ findings suggest a clear relationship between the two spreads and that credit rating and macroeconomic factors add significant information to this relationship. Furthermore, both spreads react to changes in credit ratings, and in particular to downgrades. The authors discover anticipated and lagged effects of changes in credit rating and differences between investment grades. Interestingly, the CDS market seems to react faster and more significantly than the bond market to changes in credit ratings.
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