Information flow and credit rating announcements

62 Pages Posted: 2 Aug 2019 Last revised: 27 Aug 2023

See all articles by Mehdi Khorram

Mehdi Khorram

Rochester Institute of Technology (RIT)

Haitao Mo

University of Kansas

Gary C. Sanger

Louisiana State University, Baton Rouge - E.J. Ourso College of Business Administration

Date Written: April 1, 2023

Abstract

We employ the implied volatility spread (IVS) and the short lending fee as measures of private information conveyed by their respective markets. Using issuer 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 also predict the direction and magnitude of credit rating changes. Consistent with the linkage between the short sale and options markets, 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, Stock Lending Market, Options Market, Return Predictability

JEL Classification: G10, G12, G14

Suggested Citation

Khorram, Mehdi and Mo, Haitao and Sanger, Gary C., Information flow and credit rating announcements (April 1, 2023). Journal of Financial Markets, Forthcoming, Available at SSRN: https://ssrn.com/abstract=3428816 or http://dx.doi.org/10.2139/ssrn.3428816

Mehdi Khorram (Contact Author)

Rochester Institute of Technology (RIT) ( email )

Rochester, NY 14623
United States

Haitao Mo

University of Kansas

Lawrence, KS 66045
United States

Gary C. Sanger

Louisiana State University, Baton Rouge - E.J. Ourso College of Business Administration ( email )

2163 CEBA
Baton Rouge, LA 70803-6308
United States
225-578-6353 (Phone)
225-578-6366 (Fax)

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