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Credit rating agencies and idiosyncratic risk: Is there a linkage? Evidence from the Spanish Market

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  • Abad, Pilar
  • Robles, M. Dolores

Abstract

This study analyzes the effects of six different credit rating announcements on systematic and idiosyncratic risks in Spanish stocks from 1988 to 2010. We used an extension of the event study dummy approach that includes direct effects on beta risk and volatility. We identified effects on both kinds of risk, indicating that rating agencies provide new information to the market. All types of rating announcements (upgrades/downgrades, reviews and outlook reports), whether positive or negative, have a significant impact on risks. Rating actions that indicate improvements in credit quality cause lower idiosyncratic risk. Positive outlook reports also cause lower systematic risk. Conversely, ratings announcements that indicate deteriorations in credit quality are linked to a rebalance of both types of risks, with a higher beta risk together with a lower diversifiable risk. The relevant factors that determine how the two kinds of risks react to rating changes are mainly characteristics of the effective rating changes. The 2007 global financial crisis increased the market's sensitivity to these characteristics.

Suggested Citation

  • Abad, Pilar & Robles, M. Dolores, 2014. "Credit rating agencies and idiosyncratic risk: Is there a linkage? Evidence from the Spanish Market," International Review of Economics & Finance, Elsevier, vol. 33(C), pages 152-171.
  • Handle: RePEc:eee:reveco:v:33:y:2014:i:c:p:152-171
    DOI: 10.1016/j.iref.2014.05.002
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    1. repec:eee:finana:v:62:y:2019:i:c:p:91-103 is not listed on IDEAS
    2. repec:eee:reveco:v:51:y:2017:i:c:p:660-676 is not listed on IDEAS
    3. López-Penabad, Mª Celia & López-Andión, Carmen & Iglesias-Casal, Ana & Maside-Sanfiz, Jose Manuel, 2015. "Securitization in Spain and the wealth effect for shareholders," International Review of Economics & Finance, Elsevier, vol. 37(C), pages 308-323.
    4. Lu, Yang-Cheng & Wei, Yu-Chen & Chang, Tsang-Yao, 2015. "The effects and applicability of financial media reports on corporate default ratings," International Review of Economics & Finance, Elsevier, vol. 36(C), pages 69-87.
    5. repec:ris:buecrj:0397 is not listed on IDEAS

    More about this item

    Keywords

    Credit rating agencies; Rating changes; Market model; Systematic risk; Idiosyncratic risk;

    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
    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage
    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes

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