Why Ratings Matter: Evidence from Lehman's Index Rating Rule Change
AbstractThis paper examines the role of bond ratings and the effects of rating-based regulations in the corporate bond market. Exploiting an unanticipated mechanical change in how the benchmark Lehman bond indices are constructed in 2005, we show that rating-induced market segmentation of the bond market into investment-grade and high-yield sectors has a first-order impact on bond prices. Bonds that are mechanically upgraded to investment-grade due to the Lehman announcement have positive abnormal returns of two percent on average and exhibit abnormal order flows over several months. The abnormal bond returns are larger for bonds with longer maturities and higher turnover. We find that institutional investors with rating's-based portfolo constraints substantially increase their holdings in the a ected bonds. In addition, return correlations with the investment-grade index increase for the upgraded bonds. Bonds on watch for downgrade to high-yield but with favorable Fitch rating experience reduced selling and rapid price recovery.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by Swiss Finance Institute in its series Swiss Finance Institute Research Paper Series with number 10-30.
Length: 61 pages
Date of creation: Jun 2010
Date of revision:
Corporate bond market; rating agencies; rating-based regulation; market segmentation; liquidity; index addition; institutional investors;
Find related papers by JEL classification:
- G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
- G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
You can help add them by filling out this form.
CitEc Project, subscribe to its RSS feed for this item.
- Bo Becker & Todd Milbourn, 2010.
"How did increased competition affect credit ratings?,"
NBER Working Papers
16404, National Bureau of Economic Research, Inc.
- Becker, Bo & Milbourn, Todd, 2011. "How did increased competition affect credit ratings?," Journal of Financial Economics, Elsevier, vol. 101(3), pages 493-514, September.
- Bruno Strulovici & Darrell Duffie, 2009.
"Capital Mobility and Asset Pricing,"
2009 Meeting Papers
87, Society for Economic Dynamics.
- Darrell Duffie & Bruno Strulovici, 2009. "Capital Mobility and Asset Pricing," Discussion Papers 1478, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
- Darrell Duffie & Bruno Strulovici, 2011. "Capital Mobility and Asset Pricing," NBER Working Papers 17296, National Bureau of Economic Research, Inc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Marilyn Barja).
If references are entirely missing, you can add them using this form.