Ann Oper Res (2018) 266:395–440
ANALYTICAL MODELS FOR FINANCIAL MODELING AND RISK MANAGEMENT
Are ﬁnancial ratios relevant for trading credit risk?
Evidence from the CDS market
· Nikos E. Vlachogiannakis
Published online: 28 November 2016
© Springer Science+Business Media New York 2016
Abstract We propose a combination of LASSO with panel-consistent estimation methods to
investigate whether ﬁnancial ratios are used in the decision-making process of CDS traders.
Our results indicate that ﬁnancial statement information does play a role in all the trading
horizons surrounding the announcement date and the corresponding styles. These include
pro-active analysts trying to predict quarterly results, news traders reacting to unanticipated
information and value traders who ﬁne-tune their estimates and act accordingly at a later
stage. Our ﬁndings also suggest that CDS traders respond asymmetrically to ﬁnancial ratio
updates of different sign and intensity.
Keywords CDS · Financial ratios · LASSO · Event study · Asymmetrical impact · Quantile
JEL Classiﬁcation C21 · G14 · G15 · G33
Financial ratios have been ofﬁcially considered as a critical part of traditional credit analysis
for well over 4 decades, at least since the seminal papers of Altman (1968), Shumway (2001),
This working paper should not be reported as representing the views of the Bank of Greece (BoG). The
views expressed are those of the authors.
Nikos E. Vlachogiannakis
Department of Accounting and Finance, Athens University of Economics and Business,
76 Patission Street, 104 34 Athens, Greece
Market and Liquidity Risk Analysis Section, Bank of Greece, 3 Amerikis Street,
102 50 Athens, Greece