Information Transfer Effects of Bond Rating Downgrades

24 Pages Posted: 13 Jul 2010

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

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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.

Suggested Citation

Jorion, Philippe and Zhang, Gaiyan, Information Transfer Effects of Bond Rating Downgrades. Financial Review, Vol. 45, Issue 3, pp. 683-706, August 2010, Available at SSRN: https://ssrn.com/abstract=1639199 or http://dx.doi.org/10.1111/j.1540-6288.2010.00266.x

Philippe Jorion (Contact Author)

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

Campus Drive
Irvine, CA 92697-3125
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Gaiyan Zhang

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

One University Blvd
St. Louis, MO 63121
United States

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