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Credit Rating Announcements, Trading Activity and Yield Spreads: The Spanish Evidence

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Abstract

We test whether or not different rating announcements contain pricing-relevant information and modify trading activity patterns in the Spanish commercial paper and corporate bond markets. We observe a statistically significant widening of yield spreads in both segments of the corporate debt market after reviews of downgrades and negative outlook reports. In addition, we find that certain rating announcements encourage trading activity even when the information is not pricing-relevant. The release of information arouses investor interest for the involved securities. Thus, trading frequency increases, although larger-sized transactions, which should denote possible portfolio rebalancing, are not observed. In the commercial paper note market, we also find that that trading volumes fade away after reviews for downgrade. Investors seem to prefer reducing the trading of these short-term securities to liquidating their positions.

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Paper provided by Universidad Complutense de Madrid, Facultad de Ciencias Económicas y Empresariales in its series Documentos del Instituto Complutense de Análisis Económico with number 2011-36.

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Length: 28 pages
Date of creation: 2011
Date of revision:
Handle: RePEc:ucm:doicae:1136

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Keywords: Credit rating agencies; Rating changes; Event study; Yields; Liquidity; Trading frequency; Corporate bond market; Commercial paper market.;

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  1. Nelson, Charles R & Siegel, Andrew F, 1987. "Parsimonious Modeling of Yield Curves," The Journal of Business, University of Chicago Press, vol. 60(4), pages 473-89, October.
  2. Doron Kliger & Oded Sarig, . "The Information Value of Bond Ratings," Rodney L. White Center for Financial Research Working Papers 13-97, Wharton School Rodney L. White Center for Financial Research.
  3. Pilar Abad & Antonio Diaz & M. Dolores Robles-Fernandez, 2011. "Determinants of trading activity after rating actions in the Corporate Debt Market," Documentos del Instituto Complutense de Análisis Económico 2011-37, Universidad Complutense de Madrid, Facultad de Ciencias Económicas y Empresariales.
  4. Norden, Lars & Weber, Martin, 2004. "Informational efficiency of credit default swap and stock markets: The impact of credit rating announcements," Journal of Banking & Finance, Elsevier, vol. 28(11), pages 2813-2843, November.
  5. Norden, Lars & Weber, Martin, 2004. "Informational Efficiency of Credit Default Swap and Stock Markets: The Impact of Credit Rating Announcements," CEPR Discussion Papers 4250, C.E.P.R. Discussion Papers.
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