A research for spillover effect of sovereign credit ratings news on CDS spreads

The financial crisis in 2008 affected following the global financial markets the real economy and has changed the perception of investors. Since it is thought that the impact of the derivative products is important in the beginning and deepening the crisis, primarily in derivative markets is expected to be a change in perception. Therefore, in this study, the effects of credit events on CDS, derivative product, spreads and transfer channels were examined in the period before and after the crisis. It is achieved that due to rising risk appetite of investors CDS spreads showed no reaction to the credit events in the pre-crisis period. On the other hand, it is concluded that with a significant decrease in the level of risk appetite CDS spreads responded significantly to the credit events in the post-crisis period. In addition, it was proven that CDS spreads were affected by sovereign credit ratings of both event and nonevent country particularly in the post-crisis period. It was seen that spillover effect transferred with the parameter of trade bloc. Moreover, it was observed that the effect of negative credit events transferred with the parameter of developed country in the post-crisis period including the European debt crisis. It is thought that the alteration of CDS spreads? responses to credit events in the post-crisis are related to a decrease in risk appetite of the investors and Credit Rating Agencies giving more prudent to fix the reputation deteriorating in the pre-crisis period. Key Words: Credit Derivatives Swaps, Credit Rating Agency, Event Analysis, Spillover Effect, Transmission Channel, Risk Appetite.