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Credit Rating Agencies, Information Asymmetry and US Bond Liquidity

Author

Listed:
  • Lovo, Stefano

    (HEC Paris)

  • Raimbourg, Philippe

    (Université Paris I Panthéon-Sorbonne)

  • Salvadè, Federica

    (PSB Paris School of Business)

Abstract

Do rating announcements reduce information asymmetries? We investigate the effect of rating disclosures on the volatility and liquidity of the US bond market. Although rating agencies' decisions often are anticipated by credit spread changes, we show that in the case of no regulatory change their release can reduce volatility and the bid-ask spread. This reduction is stronger when the rating agency announcement has been anticipated by the market, namely, after downgrades, whereas upgrades trigger mixed reaction. These findings are consistent with the predictions of a simple sequential trade model with event uncertainty, and noise and informed traders.

Suggested Citation

  • Lovo, Stefano & Raimbourg, Philippe & Salvadè, Federica, 2022. "Credit Rating Agencies, Information Asymmetry and US Bond Liquidity," HEC Research Papers Series 1456, HEC Paris.
    • Handle: RePEc:ebg:heccah:1456
    DOI: 10.2139/ssrn.4056558
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    More about this item

    Keywords

    rating; volatility; bid-ask spread; price discovery process;
    All these keywords.

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • 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

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