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The Relationship Between Credit Default Swap Spreads, Bond Yields, and Credit Rating Announcements

by John Hull of the University of Toronto,
Mirela Predescu of the University of Toronto, and
Alan White of the University of Toronto

January 2004

Abstract: A company's credit default swap spread is the cost per annum for protection against a default by the company. In this paper we analyze data on credit default swap spreads collected by a credit derivatives broker. We first examine the relationship between credit default spreads and bond yields and reach conclusions on the benchmark risk-free rate used by participants in the credit derivatives market. We then carry out a series of tests to explore the extent to which credit rating announcements by Moody's are anticipated by participants in the credit default swap market.

Published in: Journal of Banking & Finance, Vol. 28, No. 11, (November 2004), pp. 2789-2811.

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