The Information Content and Redistribution Effects of State and Municipal Rating Changes in Mexico
AbstractThe fiscal and financial reforms carried out in Mexico in 2000 have encouraged a widespread presence of rating agencies and have allowed several States and unicipalities to raise funds through bond offerings in the capital market. Any local government in Mexico intending to access credit and capital markets must count with at least one credit rating from one of the three main agencies : FitchRatings, Moody's and Standard & Poor's. This paper investigates the impact of rating changes to State and Municipal governments on bond returns in Mexico. By employing a Capital Asset Pricing Model (CAPM) structure for the mean equation that allows conditional volatility, we find strong support for the Information Content Signaling Hypothesis (ICSH), i.e., rating upgrades (downgrades) are followed by greater (lower) bond returns. We also find some support for the Wealth Redistribution Hypothesis (WRH) indicating that rating upgrades (downgrades) are followed by lower (greater) bond returns. In addition to this, we find high volatility persistence, significant asymmetric responses of volatility to bad and good news, a negative association between market volatility and the level of bond returns and significant effects of volatility in response to rating changes. Finally, the estimations show the market anticipates and responds to rating changes within five-day momentum windows. There is a comparatively stronger reaction of returns on the event day favoring the hypothesis of market inefficiency. --
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Bibliographic InfoPaper provided by Kiel Institute for the World Economy in its series Economics Discussion Papers with number 2009-17.
Date of creation: 2009
Date of revision:
Credit rating changes; municipal bond returns; CAPM; EGARCH-in-Mean;
Find related papers by JEL classification:
- G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
- H74 - Public Economics - - State and Local Government; Intergovernmental Relations - - - State and Local Borrowing
- H77 - Public Economics - - State and Local Government; Intergovernmental Relations - - - Intergovernmental Relations; Federalism
- C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models &bull Diffusion Processes
- G20 - Financial Economics - - Financial Institutions and Services - - - General
This paper has been announced in the following NEP Reports:
- NEP-ALL-2009-06-10 (All new papers)
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