Rating-Based Investment Practices and Bond Market Segmentation
WFA 2012 Las Vegas Meetings Paper
62 Pages Posted: 16 Feb 2009 Last revised: 27 Jun 2014
Date Written: June 25, 2014
Abstract
This paper documents a new channel for rating-based bond market segmentation which, in contrast to prior research, is based on non-regulatory asset management practices. A 2005 Lehman Brothers index redefinition provides a quasi-natural experiment in which a number of previously high-yield split-rated bonds were mechanically relabeled as investment grade. Although their regulatory standing was unaffected, these bonds experienced abnormal yield declines of 63 basis points. These valuation changes can be traced to buying by segmented institutional investors for whom these bonds became investable. Reputation, regulation, and liquidity cannot explain the observed price and trading patterns.
Keywords: Corporate bond market, rating agencies, market segmentation, institutional investors, rating-based investment management practices
JEL Classification: G12, G14
Suggested Citation: Suggested Citation
Do you have negative results from your research you’d like to share?
Recommended Papers
-
By Patrick Bolton, Xavier Freixas, ...
-
By Patrick Bolton, Xavier Freixas, ...
-
By Patrick Bolton, Xavier Freixas, ...
-
Ratings Shopping and Asset Complexity: A Theory of Ratings Inflation
By Vasiliki Skreta and Laura Veldkamp
-
Ratings Shopping and Asset Complexity: A Theory of Ratings Inflation
By Vasiliki Skreta and Laura Veldkamp
-
Credit Ratings as Coordination Mechanisms
By Arnoud W. A. Boot, Todd T. Milbourn, ...
-
How Did Increased Competition Affect Credit Ratings?
By Bo Becker and Todd T. Milbourn
-
How Did Increased Competition Affect Credit Ratings?
By Bo Becker and Todd T. Milbourn