Causality Relationship between Bond Ratings and Credit Spreads

39 Pages Posted: 23 Oct 2013

See all articles by Ortenca Kume

Ortenca Kume

University of Kent - Kent Business School

Charlie Weir

Robert Gordon University - Aberdeen Business School

Date Written: June 1, 2012

Abstract

The role of credit rating agencies has been questioned in the recent years. Existing empirical studies provide mixed evidence on the informational value of bond ratings for financial investors. In this study we examine the relationship between bond ratings and credit spreads for US corporate bonds using a Granger causality approach in panel data sets. The findings indicate that ratings generally carry some informational value for corporate bond investors. The causal relationship is more evident for negative watch lists and during periods of economic uncertainty, but its direction depends on ratings quality. Overall, we find bond ratings and credit spreads to be related in long-term.

Keywords: credit spreads, default risk, bond ratings, Granger causality, bond pricing, panel data

JEL Classification: G14, G12, G24

Suggested Citation

Kume, Ortenca and Weir, Charles, Causality Relationship between Bond Ratings and Credit Spreads (June 1, 2012). Available at SSRN: https://ssrn.com/abstract=2344122 or http://dx.doi.org/10.2139/ssrn.2344122

Ortenca Kume (Contact Author)

University of Kent - Kent Business School ( email )

Canterbury, Kent CT2 7PE
United Kingdom

Charles Weir

Robert Gordon University - Aberdeen Business School ( email )

Garthdee Road
RGU
Aberdeen AB10 7QE
United Kingdom
0044 1224 263800 (Phone)
0044 1224 263838 (Fax)

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