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The Dynamics Of Bond Yield Spreads Around Rating Revision Dates

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  • Roy Batchelor
  • Katiuscia Manzoni

Abstract

We examine the effect of rating revisions on sterling Eurobond yields using a panel model with conditional heteroskedasticity that controls for event-induced changes in the variance of spreads. Positive rating revisions are fully anticipated by the time the upgrade occurs. Negative revisions are only partially anticipated, and spreads on downgraded bonds rise for some time after the downgrade has been announced. This asymmetry is not apparent in a conventional event study model. All ratings announcements are accompanied by a temporary fall in yield volatility. We attribute this to the resolution of uncertainty about the true rating of the bond. 2006 The Southern Finance Association and the Southwestern Finance Association.

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Bibliographic Info

Article provided by Southern Finance Association & Southwestern Finance Association in its journal Journal of Financial Research.

Volume (Year): 29 (2006)
Issue (Month): 3 ()
Pages: 405-420

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Handle: RePEc:bla:jfnres:v:29:y:2006:i:3:p:405-420

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Cited by:
  1. Alizadeh, Amir H. & Gabrielsen, Alexandros, 2013. "Dynamics of credit spread moments of European corporate bond indexes," Journal of Banking & Finance, Elsevier, Elsevier, vol. 37(8), pages 3125-3144.

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