CDS price volatility: the key signal

This paper investigates the role of CDS volatility in providing infor- mation concerning the credit quality of a company. In Castellano and D Ecclesia (2011) a rst analysis of how CDS quotes respond to rating announcements is provided and it is shown that market participants do not rely much on Rating Agencies, especially during pe- riods characterized by very high volatility, i.e. during the nancial crisis. Here, a more accurate analysis of the CDS s ability in providing timely information of the creditworthiness of reference entities is performed estimating the volatility of CDS quotes using Exponential GARCH(1,1) models. The event study methodology is then applied to a sample of CDS quotes for US and European markets, over the period 2004-2009. Re- sults provide an accurate understanding of market behavior in presence of news released by Rating Agencies. Overall, market participants seem to provide timely reactions around the event date and we show that the key element of signaling is represented by the changing volatility in CDS quotes, before and after the rating event