Information Transfer Effects of Bond Rating Downgrades

Financial Review, Forthcoming

32 Pages Posted: 31 Oct 2009

See all articles by Philippe Jorion

Philippe Jorion

University of California, Irvine - Paul Merage School of Business

Gaiyan Zhang

University of Missouri at St. Louis - College of Business Administration

Multiple version iconThere are 2 versions of this paper

Date Written: August 1, 2009

Abstract

This paper investigates information transfer effects of bond rating downgrades measured by equity abnormal returns for industry portfolios. Industry rivals can be subject to two opposing effects, the contagion effect and the competition effect. We find that the net effect is strongly dependent on the original bond rating of the downgraded firm. For investment-grade (speculative-grade) firms, industry abnormal equity returns are negative (positive), which implies a predominant contagion (competition) effect. The analysis reveals a rich pattern of positive and negative correlations across negative credit events, which can be used to improve our understanding of portfolio credit risk models.

Keywords: bond rating downgrades, industry information transfer, contagion effects, competition effects

JEL Classification: G14, G32

Suggested Citation

Jorion, Philippe and Zhang, Gaiyan, Information Transfer Effects of Bond Rating Downgrades (August 1, 2009). Financial Review, Forthcoming, Available at SSRN: https://ssrn.com/abstract=1497533

Philippe Jorion

University of California, Irvine - Paul Merage School of Business ( email )

Campus Drive
Irvine, CA 92697-3125
United States
949-824-5245 (Phone)
949-824-8469 (Fax)

Gaiyan Zhang (Contact Author)

University of Missouri at St. Louis - College of Business Administration ( email )

One University Blvd
St. Louis, MO 63121
United States

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