European Rating Actions, Investor Reaction, and Bond Spread Volatility

28 Pages Posted: 30 Jun 2015

See all articles by Jean‐Noël Ory

Jean‐Noël Ory

CEREFIGE, University of Lorraine

Philippe Raimbourg

Université Paris I Panthéon-Sorbonne

Date Written: July 2015

Abstract

This paper uses unit root tests that allow for structural breaks in order to examine the impact of ratings announcements on European bond credit spreads. In general, there are no noticeable reactions to announcements for issues in euros, which comes in contrast to the results of previous studies on US corporate bonds. However, we have noticed a reaction to rating actions for issues in sterling. In the case of a reaction to a downgrade or a negative watch, investor reaction generally occurs before the rating announcement, and negative watches are anticipated by investors a little more frequently than downgrades. For this type of event, we see a decrease in spread volatility after the rating announcements, as if the action of the rating agency confirms the informed investors’ perception of default risk, and in doing so, stabilizes spreads and reduces spread volatilities.

Suggested Citation

Ory, Jean‐Noel and Raimbourg, Philippe, European Rating Actions, Investor Reaction, and Bond Spread Volatility (July 2015). Economic Notes, Vol. 44, Issue 2, pp. 333-360, 2015, Available at SSRN: https://ssrn.com/abstract=2624830 or http://dx.doi.org/10.1111/ecno.12038

Jean‐Noel Ory (Contact Author)

CEREFIGE, University of Lorraine ( email )

13 rue Michel Ney
Nancy, 54000
France

Philippe Raimbourg

Université Paris I Panthéon-Sorbonne ( email )

12, place du Panthéon
Paris, IL
France
+33 1 40 46 27 62 (Phone)
+33 1 40 46 31 77 (Fax)

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