Credit spread volatility, bond ratings and the risk reduction effect of watchlistings
This article examines the relationship between the volatility of the credit risk premium of a plain vanilla bond and its credit rating. We calculate volatilities over different time windows and test for differences in the mean volatility depending on the bond rating. We check for the influence of further factors that are theoretically relevant for the explanation of the credit spread volatility. Moreover, we check the dynamic effect of rating changes on bond spread volatility. Finally, we test whether credit watchlistings influence credit spread volatility. We confirm prior studies in that, generally, credit ratings rank the risk of bonds according to credit spread volatility. We further find that rating changes have a dynamic influence on spread volatilities. Additionally it is shown that credit watchlistings significantly reduce the volatility. Thus, watchlistings are perceived to offer valuable information. Copyright © 2006 John Wiley & Sons, Ltd.
Volume (Year): 11 (2006)
Issue (Month): 4 ()
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- Reilly, Frank K & Joehnk, Michael D, 1976. "The Association between Market-Determined Risk Measures for Bonds and Bond Ratings," Journal of Finance, American Finance Association, vol. 31(5), pages 1387-1403, December.
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- Richard Cantor & Frank Packer & Kevin Cole, 1997. "Split ratings and the pricing of credit risk," Research Paper 9711, Federal Reserve Bank of New York.
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