The effect of Countries’ credit ratings on credit default swap spreads

Abstract

This paper investigates the relationship between credit spreads and credit default swap (CDS) spreads, and how these respond to changes in credit ratings. It is based on the analysis and a review of the existing world literature addressing this subject. Panel data models for 35 European countries for the period 2005-2013 were used. The independent variables used in countries’ long- and short-term credit ratings were awarded by the rating agencies Standard & Poor’s and Moody’s Investor Service. Credit ratings were converted linearly to the numeric variables. The paper examines the impact of countries’ credit ratings on the value of their CDS. The analysis was performed taking into account the level of investment and speculative group of risk.