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Are credit ratings and Cds spreads aligned? The implications for regulation and loan pricing

Alberto Burchi, Danilo Drago
October 2012 - n°10
Jel codes: G21, G33, G28

Ratings measure the counterparty risk for an issuer or an issue while Cds are a market evaluation of the same risk exposure. The market evaluation could be not aligned with the rating agencies’ judgment and the difference could be relevant. The article presents an empirical analysis on a sample of US firms in order to demonstrate the existence of a significant difference between the ratings and the Cds that could affect the lending policy of a bank.

 

 

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