Credit rating announcements, trading activity and yield spreads: the Spanish evidence

Abstract

Abstract:We test whether or not different rating announcements contain pricing-relevant information and modify trading activity patterns in the Spanish commercial paper and corporate bond markets. We observe a statistically significant widening of yield spreads in both segments of the corporate debt market after reviews of downgrades and negative outlook reports. In addition, we find that certain rating announcements encourage trading activity even when the information is not pricing-relevant. The release of information arouses investor interest for the involved securities. Thus, trading frequency increases, although larger-sized transactions, which should denote possible portfolio rebalancing, are not observed. In the commercial paper note market, we also find that that trading volumes fade away after reviews for downgrade. Investors seem to prefer reducing the trading of these short-term securities to liquidating their positions.

Efficiency and credit ratings: a permutation-information-theory analysis

“…Lu et al [21] study the effect of uncertainty and asymmetry of information over corporate bond spreads and find that yield spread of bonds with short maturities are partially explained by corporate credit rating. Abad et al [22] find evidence that negative announcements of ratings convey relevant information to the market.…”

Does rating shopping exist in spanish securitization issues?

“…Obtaining a reliable, objective and external rating of the quality of the securitization issue is a determining factor to perform efficiently the resource-generation and risk-transmission processes on the capital markets (Abad and Robles, 2007;Deprés, 2011;Abad et al, 2012). Credit rating agencies (hereinafter CRAs) have played a particularly important role in the securitization operations performed in the financial systems of different countries (see Otero et al (2013) for the Spanish market).…”