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The Effects of Credit Rating Announcements on Bond Liquidity: An Event Study

In: Mathematical and Statistical Methods for Actuarial Sciences and Finance

Author

Listed:
  • Pilar Abad

    (Universidad Rey Juan Carlos de Madrid)

  • Antonio Diaz

    (Universidad de Castilla-La Mancha)

  • Ana Escribano

    (Universidad de Castilla-La Mancha)

  • M. Dolores Robles

    (Universidad Complutense de Madrid)

Abstract

This paper investigates liquidity shocks on the US corporate bond market around credit rating change announcements. These shocks may be induced by the information content of the announcement itself, and abnormal trading activity can be triggered by the release of information after any upgrade or downgrade. Our findings show that: (1) the market anticipates rating changes, since trends liquidity proxies prelude the event, and additionally, large volume transactions are detected the day before the downgrade; (2) the concrete materialization of the announcement is not fully anticipated, since we only observe price overreaction immediately after downgrades; (3) a clear asymmetric reaction to positive and negative rating events is observed; (4) different agency-specific and rating-specific features are able to explain liquidity behavior around rating events; (5) financial distress periods exacerbate liquidity responses derived from downgrades and upgrades.

Suggested Citation

  • Pilar Abad & Antonio Diaz & Ana Escribano & M. Dolores Robles, 2017. "The Effects of Credit Rating Announcements on Bond Liquidity: An Event Study," Springer Books, in: Marco Corazza & Florence Legros & Cira Perna & Marilena Sibillo (ed.), Mathematical and Statistical Methods for Actuarial Sciences and Finance, pages 1-15, Springer.
    • Handle: RePEc:spr:sprchp:978-3-319-50234-2_1
    DOI: 10.1007/978-3-319-50234-2_1
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