Does it Really Hurt?<i>An Empirical Investigation of the Effects of Downgradings and Negative Watches on European Bond Spreads</i>

Ory, Jean‐Noël; Raimbourg, Philippe; Salvi, Antonio

doi:10.3905/jfi.2010.2010.1.004

Cited by 2 publications

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“…Our empirical analysis confirms other empirical paths documented in the literature. In particular, we find that downgrades (upgrades) increase (decrease) credit spread and that this effect is more pronounced for downgrades that confirms the findings from several previous studies (see, e.g., Dichev & Piotrosky, 2001;Goh & Ederington, 1993;Grier & Katz, 1976;Hand et al, 1992;Heinke & Steiner, 2001;Hettenhouse & Sartoris, 1976;Hite & Warga, 1997;Holthausen & Leftwich, 1986;May, 2010;McCarthy & Melicher, 1988;Ory & Raimbourg, 2015;Ory et al, 2011;Weinstein, 1977, among others).…”

Section: Related Literaturesupporting

confidence: 90%

“…Finally, to neutralize shifts in the default risk market price, we compute the relative credit spread as the issuer credit spread minus the contemporaneous spread index published by Bank of America for matched corporate bonds differentiated by rating category and industry. 19 This means that our relative credit risk should reflect only the size of the issuer default risk (Ory et al, 2011).…”

Section: Variables Definitionmentioning

confidence: 99%

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Credit rating agencies, information asymmetry and US bond liquidity

Lovo

Raimbourg

Salvadè

2022

Business Fin & Account

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Do rating announcements reduce information asymmetries?We investigate the effect of rating disclosures on the volatility and liquidity of the US bond market. Although rating agencies' decisions are often anticipated by credit spread changes, we show that in the case of no regulatory change, their release can reduce volatility and the bid-ask spread. This reduction is stronger when the rating agency announcement has been anticipated by the market, namely, after downgrades, whereas upgrades trigger a mixed reaction.These findings are consistent with the predictions of a simple sequential trade model with event uncertainty and noise and informed traders.

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Section: Related Literaturesupporting

confidence: 90%

Section: Variables Definitionmentioning

confidence: 99%

Credit rating agencies, information asymmetry and US bond liquidity

Lovo

Raimbourg

Salvadè

2022

Business Fin & Account

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“…Norden and Weber (: 2816–2817) provide a synopsis of these studies. It appears that upgrades have little effect on bond prices, while downgrades may correspond to a change in bond spreads—especially if the rating is low before the announcement (most recently, Jorion and Zhang, ; Ory et al , ). However, in many cases, the change in bond spreads occurs prior to the downgrade (Grier and Katz, ; Hettenhouse and Sartoris, ; Weinstein, ; McCarthy and Melicher, ; Hite and Warga, ; Steiner and Heinke, ).…”

Section: Introductionmentioning

confidence: 99%

European Rating Actions, Investor Reaction, and Bond Spread Volatility

Ory¹,

Raimbourg²

2015

Economic Notes

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This paper uses unit root tests that allow for structural breaks in order to examine the impact of ratings announcements on European bond credit spreads. In general, there are no noticeable reactions to announcements for issues in euros, which comes in contrast to the results of previous studies on US corporate bonds. However, we have noticed a reaction to rating actions for issues in sterling. In the case of a reaction to a downgrade or a negative watch, investor reaction generally occurs before the rating announcement, and negative watches are anticipated by investors a little more frequently than downgrades. For this type of event, we see a decrease in spread volatility after the rating announcements, as if the action of the rating agency confirms the informed investors' perception of default risk, and in doing so, stabilizes spreads and reduces spread volatilities.(J.E.L.: G14, G33).

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Does it Really Hurt?An Empirical Investigation of the Effects of Downgradings and Negative Watches on European Bond Spreads

Cited by 2 publications

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Credit rating agencies, information asymmetry and US bond liquidity

Credit rating agencies, information asymmetry and US bond liquidity

European Rating Actions, Investor Reaction, and Bond Spread Volatility

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