Credit Default Swaps

you are right, on an absolute scale, the rating and CDS spreads can vary.
however, i think ratings are still useful on a relative scale (AA vs A vs BBB).
 
(I secretly use ratings too but I don’t post about it in a public place. Very uncool).
 
JoeyDVivre Wrote:
——————————————————-
> Nah. As soon as you trade CDS on a name, the
> rating is just a trailing (distant trailing)
> indicator of its spread.
Moody’s Market-Implied Ratings folks disagree. They’ve studied what happens when analyst rating and MIR differ by 3+ notches. In appx 1/3 of such cases, the analyst rating adjusts toward the MIR; 2/3 of the time the MIR adjusts toward the analyst rating. I believe this result holds for both bond- and cds-implied ratings.
When events occur of course published ratings, which by design exhibit considerable hysteresis, trail market prices – and this is frequently the source of several spectacular counterexamples to the general finding above. But over the universe of ~7k rated and traded companies, credit markets usually overreact.
 
I don’t know that result, but it’s a strange way of measuring it anyway. We are just picking up the most extreme observations and checking them?
 
3 notches (e.g. from A2 to Baa2) isn’t particularly extreme – much of the banking sector is currently trading 6 or more notches south of published. (GS, e.g., is trading at Ba3: 9 notches off. )
Given the volatility in MIRs I think they view 1-2 notch differences as just noise, and not indicative of a real disagreement between market and agency. You can find many stable firms trading for years at 1 or 2 notch differentials to published rating. 3+ notch differences usually don’t last that long. (For the GS example above: what do you think will move more: analyst or market-implied rating?)
 
Yeah, the oh-so-dangerous hedge funds didn’t tank the damn market; it was all the big guys diving on to the bandwagon at the end of the day even though they knew market for that crap (mortgages to people who can’t afford a pizza) was bound to dive because they were petrified of a stupid article questioning why they weren’t in the market … love how one of the proposals for the “bailout” from the Dems is to pay off “underwater” mortgages instead of “paying off Wall Street”. I know the Repubs do some stupid things, but are the Dems really that stupid, or do they just think the rest of us are?
 
You must log in or register to reply here.
Back
Top