Bond Ratings and Volatility: Early Evidence from the Introduction of Credit Ratings

47 Pages Posted: 27 Aug 2023 Last revised: 15 Mar 2024

See all articles by Mascia Bedendo

Mascia Bedendo

University of Bologna - Department of Management

Lara Cathcart

Imperial College Business School

Lina El-Jahel

University of Auckland Business School

Date Written: August 22, 2023

Abstract

We exploit the unique setting provided by the introduction of credit ratings in the early 20th century to explore their value to bond investors. Specifically, we investigate whether the adoption of ratings reduced the uncertainty surrounding the assessment of bond values by testing the impact of ratings on bond volatility in a sample of bonds traded on the New York Stock Exchange. By using both difference-in-differences and matching techniques, we find that the introduction of bond ratings resulted in a decrease in the volatility of rated bonds, particularly for those bonds that were more volatile prior to their rating assignment. Our findings support an increase in agreement amongst investors about the credit quality and the value of rated bonds. Additionally, they are consistent with an increase in investors' attention, which helped facilitate the incorporation of information in bond prices.

Keywords: Credit Ratings, Bond Volatility, Attention, Agreement

JEL Classification: G14, G24

Suggested Citation

Bedendo, Mascia and Cathcart, Lara and El-Jahel, Lina, Bond Ratings and Volatility: Early Evidence from the Introduction of Credit Ratings (August 22, 2023). The University of Auckland Business School Research Paper, Available at SSRN: https://ssrn.com/abstract=4547988 or http://dx.doi.org/10.2139/ssrn.4547988

Mascia Bedendo

University of Bologna - Department of Management ( email )

Via Capo di Lucca 34
Bologna, Bologna 40126
Italy

Lara Cathcart (Contact Author)

Imperial College Business School ( email )

South Kensington Campus
Exhibition Road
London SW7 2AZ, SW7 2AZ
United Kingdom
+44 (0) 20 7594 9126 (Phone)
+44 (0) 20 7594 9189 (Fax)

Lina El-Jahel

University of Auckland Business School ( email )

12 Grafton Rd
Private Bag 92019
Auckland, 1010
New Zealand

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