Information flow and credit rating announcements

Abstract

We employ the implied volatility spread (IVS) and the short lending fee as measures of private
information conveyed by their respective markets. Using credit rating announcements as an
informational event, we find that both IVS and the short fee have significantly higher predictive
power for returns on event days versus non-event days. Both IVS and the short fee also predict the
direction and magnitude of credit rating changes. Options order imbalance (OIB) does not explain
the results. In models with both explanatory variables, the short fee remains significant in all
specifications, while IVS loses explanatory power.

Keywords: Credit Rating Announcements, Implied Volatility Spread, Lending Market, Options Market, Return Predictability

JEL Classification: G10, G12, G14