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The price impact of rating announcements: which announcements matter?

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Author Info

  • Marian Micu

    (Barclays - San Francisco, Ca Office)

  • Eli M Remolona
  • Philip D. Wooldridge
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    Abstract

    Credit rating agencies make multiple announcements, some of which are intended to reflect the latest information available about a firm and others of which are intended to provide a stable signal of credit quality. Using data on CDS spreads, we examine which of these different types of rating announcements contains pricingrelevant information. We find that all types, including changes in outlook, have a significant impact on CDS spreads. Even rating announcements preceded by similar announcements have an impact. The price impact is greatest for firms with split ratings, smallcap firms and firms rated near the threshold of investment grade.

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    Bibliographic Info

    Paper provided by Bank for International Settlements in its series BIS Working Papers with number 207.

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    Length: 31 pages
    Date of creation: Jun 2006
    Date of revision:
    Handle: RePEc:bis:biswps:207

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    Related research

    Keywords: credit default swaps; credit ratings; event study; market reaction;

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    References

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    1. Doron Kliger & Oded Sarig, 2000. "The Information Value of Bond Ratings," Journal of Finance, American Finance Association, American Finance Association, vol. 55(6), pages 2879-2902, December.
    2. Brown, Stephen J. & Warner, Jerold B., 1980. "Measuring security price performance," Journal of Financial Economics, Elsevier, Elsevier, vol. 8(3), pages 205-258, September.
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    Cited by:
    1. Afonso, António & Gomes, Pedro & Taamouti, Abderrahim, 2014. "Sovereign credit ratings, market volatility, and financial gains," Working Paper Series, European Central Bank 1654, European Central Bank.
    2. Aizenman, Joshua & Hutchison, Michael & Jinjarak, Yothin, 2011. "What is the Risk of European Sovereign Debt Defaults? Fiscal Space, CDS Spreads and Market Pricing of Risk," Santa Cruz Department of Economics, Working Paper Series qt2914v9fh, Department of Economics, UC Santa Cruz.
    3. Eli M. Remolona & Michela Scatigna & Eliza Wu, 2008. "A ratings-based approach to measuring sovereign risk," International Journal of Finance & Economics, John Wiley & Sons, Ltd., John Wiley & Sons, Ltd., vol. 13(1), pages 26-39.
    4. Ismailescu, Iuliana & Kazemi, Hossein, 2010. "The reaction of emerging market credit default swap spreads to sovereign credit rating changes," Journal of Banking & Finance, Elsevier, Elsevier, vol. 34(12), pages 2861-2873, December.
    5. Klomp, Jeroen, 2013. "Government interventions and default risk: Does one size fit all?," Journal of Financial Stability, Elsevier, Elsevier, vol. 9(4), pages 641-653.
    6. Finnerty, John D. & Miller, Cameron D. & Chen, Ren-Raw, 2013. "The impact of credit rating announcements on credit default swap spreads," Journal of Banking & Finance, Elsevier, Elsevier, vol. 37(6), pages 2011-2030.
    7. Paula Hill & Robert Faff, 2010. "The Market Impact of Relative Agency Activity in the Sovereign Ratings Market," Journal of Business Finance & Accounting, Wiley Blackwell, Wiley Blackwell, vol. 37(9-10), pages 1309-1347, November/.
    8. Ferri, Giovanni & Lacitignola, Punziana & Lee, Jeong Yeon, 2013. "Foreign ownership and the credibility of national rating agencies: Evidence from Korea," Journal of Comparative Economics, Elsevier, vol. 41(3), pages 762-776.
    9. Blumenstock, Hendrik & von Grone, Udo & Mehlhorn, Marc & Merkl, Johannes & Pietz, Marcus, 2012. "Einflussfaktoren von CDS-Spreads als Maß für das aktuelle Bonitätsrisiko: Liefert das Rating eine Erklärung?," Bayreuth Working Papers on Finance, Accounting and Taxation (FAcT-Papers) 2012-03, University of Bayreuth, Chair of Finance and Banking.
    10. Imbierowicz, Björn & Wahrenburg, Mark, 2013. "Wealth transfer effects between stockholders and bondholders," The Quarterly Review of Economics and Finance, Elsevier, Elsevier, vol. 53(1), pages 23-43.
    11. Galil, Koresh & Soffer, Gil, 2011. "Good news, bad news and rating announcements: An empirical investigation," Journal of Banking & Finance, Elsevier, Elsevier, vol. 35(11), pages 3101-3119, November.

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