THE RELATIONSHIP BETWEEN CREDIT DEFAULT SWAPS SPREADS AND CREDIT RATING ANNOUNCEMENTS: EMPIRICAL EVIDENCE FROM THE SAUDI MARKET

Abstract

A credit default swap is a contract that transfers the credit default risk of a sovereign or corporate borrower to investors. The price reflects the credit risk of the borrower. The purpose of this study is to explore the relationship between the price spreads of credit default swaps and credit rating announcements issued by Moody’s, S&P, and Fitch, to test the informational efficiency of the Saudi market through a 60-day event study of Saudi five-year sovereign credit default swaps and corporate credit default swaps for the Saudi Arabia Basic Industries Corporation. The analysis uses daily data obtained from Bloomberg for 2009 to 2015 and covers the Tawadul All Share Index and the Standard & Poor’s 500 index. This study found that there was a relationship between credit rating announcements and corporate credit default swap spreads but not between credit rating announcements and Saudi sovereign credit default swap spreads. Also, the research found that the Saudi stock market is inefficient in the weak form which is contradictory to the efficient market hypothesis. This paper will be helpful for policymakers and risk managers