Rating-Based Investment Practices and Bond Market Segmentation

WFA 2012 Las Vegas Meetings Paper

Swiss Finance Institute Research Paper No. 10-30

62 Pages Posted: 16 Feb 2009 Last revised: 27 Jun 2014

See all articles by Zhihua Chen

Zhihua Chen

School of Finance, Shanghai University of Finance and Economics

Aziz A. Lookman

Moody's Research Labs

Norman Schürhoff

University of Lausanne; Swiss Finance Institute; Centre for Economic Policy Research (CEPR)

Duane J. Seppi

Carnegie Mellon University - David A. Tepper School of Business

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

Chen, Zhihua and Lookman, Aziz A. and Schürhoff, Norman and Seppi, Duane J., Rating-Based Investment Practices and Bond Market Segmentation (June 25, 2014). WFA 2012 Las Vegas Meetings Paper; Swiss Finance Institute Research Paper No. 10-30. Available at SSRN: https://ssrn.com/abstract=1343965 or http://dx.doi.org/10.2139/ssrn.1343965

Zhihua Chen (Contact Author)

School of Finance, Shanghai University of Finance and Economics ( email )

Shanghai, 200433
China

Aziz A. Lookman

Moody's Research Labs ( email )

99 Church Street
New York, NY 10007
United States

HOME PAGE: http://sites.google.com/site/azizlookman/

Norman Schürhoff

University of Lausanne ( email )

Extranef 228
CH-1015 Lausanne
Switzerland
+41 (0)21 692 3447 (Phone)
+41 (0)21 692 3435 (Fax)

Swiss Finance Institute ( email )

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4
Switzerland

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Duane J. Seppi

Carnegie Mellon University - David A. Tepper School of Business ( email )

5000 Forbes Avenue
Pittsburgh, PA 15213-3890
United States
412-268-2298 (Phone)
412-268-8896 (Fax)

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