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Good news is no news? The impact of credit rating changes on the pricing of asset-backed securities

  • John Ammer
  • Nathanael Clinton
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    We assess the impact of credit ratings on the pricing of structured financial products, using a sample of more than 1300 changes in Moody's or Standard and Poor's (S&P) ratings of U.S. asset-backed securities (ABS). We find that rating downgrades tend to be accompanied by negative returns and widening spreads, with the average effects stronger than those that have been reported in prior research on corporate and sovereign bond ratings. A portion of the negative implications of ABS downgrades are anticipated by price movements ahead of the rating action, although to a lesser degree than has been found for bond ratings. Accordingly, ABS market participants appear to rely somewhat more on rating agencies as a source of negative news about credit risk. Nevertheless, because ABS rating downgrades are relatively rare events, their effects account for only a small fraction of the variance of returns. In contrast to our results on downgrades, market reactions to ABS rating upgrades are virtually zero, on average. Together, the results imply even greater asymmetry in the value-relevance of ABS rating changes than has been found in event studies of changes in bond ratings.

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    File URL: http://www.federalreserve.gov/pubs/ifdp/2004/809/default.htm
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    File URL: http://www.federalreserve.gov/pubs/ifdp/2004/809/ifdp809.pdf
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    Paper provided by Board of Governors of the Federal Reserve System (U.S.) in its series International Finance Discussion Papers with number 809.

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    Date of creation: 2004
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    Handle: RePEc:fip:fedgif:809
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    1. G. Ferri & L.-G. Liu & J. E. Stiglitz, 1999. "The Procyclical Role of Rating Agencies: Evidence from the East Asian Crisis," Economic Notes, Banca Monte dei Paschi di Siena SpA, vol. 28(3), pages 335-355, November.
    2. Creighton, Adam & Gower, Luke & Richards, Anthony J., 2007. "The impact of rating changes in Australian financial markets," Pacific-Basin Finance Journal, Elsevier, vol. 15(1), pages 1-17, January.
    3. Steiner, Manfred & Heinke, Volker G, 2001. "Event Study Concerning International Bond Price Effects of Credit Rating Actions," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 6(2), pages 139-57, April.
    4. Richard Cantor & Frank Packer, 1996. "Determinants and impact of sovereign credit ratings," Economic Policy Review, Federal Reserve Bank of New York, issue Oct, pages 37-53.
    5. Helmut Reisen & Julia von Maltzan, 1999. "Boom and Bust and Sovereign Ratings," OECD Development Centre Working Papers 148, OECD Publishing.
    6. Fayez Elayan & Wei Hsu & Thomas Meyer, 2003. "The informational content of credit rating announcements for share prices in a small market," Journal of Economics and Finance, Springer, vol. 27(3), pages 337-356, September.
    7. John Y. Campbell & Glen B. Taksler, 2002. "Equity Volatility and Corporate Bond Yields," Harvard Institute of Economic Research Working Papers 1945, Harvard - Institute of Economic Research.
    8. Brooks, Robert & Faff, Robert W. & Hillier, David & Hillier, Joseph, 2004. "The national market impact of sovereign rating changes," Journal of Banking & Finance, Elsevier, vol. 28(1), pages 233-250, January.
    9. Hand, John R M & Holthausen, Robert W & Leftwich, Richard W, 1992. " The Effect of Bond Rating Agency Announcements on Bond and Stock Prices," Journal of Finance, American Finance Association, vol. 47(2), pages 733-52, June.
    10. Daniel M. Covitz & Paul Harrison, 2003. "Testing conflicts of interest at bond rating agencies with market anticipation: evidence that reputation incentives dominate," Finance and Economics Discussion Series 2003-68, Board of Governors of the Federal Reserve System (U.S.).
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