Bond Ratings and Volatility: Early Evidence from the Introduction of Credit Ratings
47 Pages Posted: 27 Aug 2023 Last revised: 15 Mar 2024
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: Suggested Citation