The Analysis of the Influence of a Sovereign Foreign LT Issuer Credit Rating on Credit Spreads and Asset Swap Spreads

Masterarbeit aus dem Jahr 2012 im Fachbereich BWL - Bank, Börse, Versicherung, Fachhochschule des bfi Wien GmbH, Veranstaltung: Banking and Finance, Sprache: Deutsch, Abstract: The purpose of this paper is to measure the correlation between the foreign longtermissuer credit ratings and both, credit spreads and ASW and to assess the rolethat the Rating Agencies play on the capital markets.Ratings reflect the financial strength and credit-worthiness of the issuer as assessedby the external rating agency. Spreads indicate the market's expectations inconnection to the riskiness of the investment. Hence high spreads compensateinvestors for the higher risk taken. The result of the analysis is that there indeed existcorrelations between foreign long-term issuer credit ratings and both, credit spreadsand ASW. A high spread is strongly correlated to a low credit rating.However, even if the relationship exists, it is not possible to draw clear patterns of themarket behavior. In some of the analyzed cases, market movements took placebefore a rating change, which indicates that both, the market and rating agenciesconsidered the same information. In other cases, the market was influenced by therating change. And sometimes the market reacted different to the rating agenciesdecisions and expectations.Overall the market reacts differently fast and not homogenous to the "fundamental"information it has. This makes it impossible to clearly state the extent to which ratingsinfluence spreads. The results are not clear enough to indicate a more preciseanswer or to fully understand the market behavior. The market is a highly volatileenvironment in which it is impossible to draw predictable behavior patterns in relationpurely to the credit rating.This inconsistency in reaction is partially conflicting the theory of the strong-formEMH, as the market reacts to the asymmetric level of information available or pricesin other factors not covered in this paper.