Why Ratings Matter: Evidence from Lehman’s IndexRating Rule Change

This paper examines the role of bond ratings and the effects of rating-based regulations in thecorporate bond market. Exploiting an unanticipated mechanical change in how the benchmarkLehman bond indices are constructed in 2005, we show that rating-induced market segmentationof the bond market into investment-grade and high-yield sectors has a first-order impact on bondprices. Bonds that are mechanically upgraded to investment-grade due to the Lehman announcementhave positive abnormal returns of two percent on average and exhibit abnormal order owsover several months. The abnormal bond returns are larger for bonds with longer maturitiesand higher turnover.[...]

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Year of publication:	2010-06-01
Authors:	Chen, Zhihua ; Lookman, Aziz A. ; Schürhoff, Norman ; Seppi, Duane J.
Institutions:	Swiss National Centre of Competence in Research North South <Bern>
Subject:	Regulierung \| Liquidität \| Segmentierung \| Ratingagentur \| credit rating agencies \| Rentenmarkt \| Bond market

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Extent:	443392 bytes 59 p. application/pdf
Series:	FINRISK Working Papers Series Working Paper ; No. 628 (2010)
Type of publication:	Book / Working Paper
Language:	English
Classification:	G12 - Asset Pricing ; G14 - Information and Market Efficiency; Event Studies ; Employment of capital, capital investment planning and estimate of investment profitability ; Consumer behaviour ; Management of financial services: stock exchange and bank management science (including saving banks) ; Individual Working Papers, Preprints ; No country specification
Source:	USB Cologne (business full texts)

Persistent link: https://www.econbiz.de/10009248846