Information flow and credit rating announcements

56 Pages Posted: 2 Aug 2019 Last revised: 4 Nov 2020

See all articles by Mehdi Khorram

Mehdi Khorram

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

Haitao Mo

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

Gary C. Sanger

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

Date Written: March 10, 2019

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

Suggested Citation

Khorram, Mehdi and Mo, Haitao and Sanger, Gary C., Information flow and credit rating announcements (March 10, 2019). Available at SSRN: https://ssrn.com/abstract=3428816 or http://dx.doi.org/10.2139/ssrn.3428816

Mehdi Khorram (Contact Author)

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

Baton Rouge, LA 70803-6308
United States

Haitao Mo

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

Baton Rouge, LA 70803-6308
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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