Fallen Angels and Price Pressure

Ambrose, Brent W.; Cai, Kelly Nianyun; Helwege, Jean

doi:10.3905/jfi.2012.21.3.074

Cited by 37 publications

(13 citation statements)

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“…11 See Sharma, Easterwood, and Kumar (2006); Puckett and Yan (2008); Dasgupta, Prat, and Verardo (2011);and Brown, Wei, and Wermers (2013). (2015) and Goldstein, Jiang, and Ng (2015) explore the flow-to-performance patterns of corporate bond mutual funds, Chen, Ferson, and Peters (2010b) evaluate the timing ability of bond funds, Moneta (2015) studies the relationship between bond fund performance and their portfolio holdings, Becker and Ivashina (2015) document a "reaching-for-yield" behavior of insurance companies in their investment on corporate bonds, and Manconi, Massa, andYasuda (2012), Ellul, Jotikasthira, andLundblad (2011) and Ambrose, Cai, and Helwege (2012) study the fire-sale behavior of bond mutual fund and insurance companies, respectively. We complement the literature by providing a comprehensive analysis on the correlated trading behavior of three major institutional investors of corporate bonds-mutual funds, insurance companies, and pension funds.…”

Section: Related Workmentioning

confidence: 99%

“…2 Duffie (2010) argues that dealers' balance sheet constraints may prevent capital from moving quickly to profitable opportunities at the time of shocks, resulting in a sharp price reaction and a subsequent reversal. For related empirical evidence, Ambrose, Cai, and Helwege (2012) and Ellul, Jotikasthira, and Lundblad (2011) have mixed results on the price impact of institutional sales in the corporate bond market, and Bao, O'Hara, and Zhou (2016) and Bessembinder et al (2016) find that dealers' capacity of market-making affects corporate bond trading liquidity.…”

Section: Introductionmentioning

confidence: 99%

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Institutional herding and its price impact: Evidence from the corporate bond market

Cai

Han

et al. 2019

Journal of Financial Economics

168

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Among growing concerns about potential financial stability risks posed by the asset management industry, herding has been considered as an important risk amplification channel. In this paper, we examine the extent to which institutional investors herd in their trading of U.S. corporate bonds and quantify the price impact of such herding behavior. We find that, relative to what is documented for the equity market, the level of institutional herding is much higher in the corporate bond market, particularly among speculative-grade bonds. In addition, mutual funds have become increasingly likely to herd when they sell, a trend not observed among insurance companies and pension funds. We also show that bond investors herd not only within a quarter, but also over adjacent quarters. Such persistence in trading is largely driven by funds imitating the trading behavior of other funds in the previous quarter. Finally, we find that there is an asymmetry in the price impact of herding. While buy herding is associated with a permanent price impact that is consistent with price discovery, sell herding results in transitory yet significant price distortions. The price destabilizing effect of sell herding is particularly strong for high-yield bonds, small bonds, and illiquid bonds and during the recent global financial crisis.

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Section: Related Workmentioning

confidence: 99%

Section: Introductionmentioning

confidence: 99%

Institutional herding and its price impact: Evidence from the corporate bond market

Cai

Han

et al. 2019

Journal of Financial Economics

168

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“…They argue that, everything else the same, CDS rates increase as the underlying corporate bonds become more illiquid and, as a result, expected loss given default becomes larger. Ambrose, Cai, and Helwege (2012), Ellul, Jotikasthira, and Lundblad (2012) and Chen, Lookman, Schürho↵, and Seppi (2014) analyze the e↵ects of price pressure in corporate bond markets associated with rating downgrades, particularly those associated with transitions between investment-grade (IG) and high-yield (HY) ratings. This IG-HY segmentation e↵ect may also spill over from bond to CDS trading.…”

Section: Introductionmentioning

confidence: 99%

“…The standard deviation of log(IV atm ) is 0.42, which roughly translates into a 50% change in IV atm . The standard deviation of log(IV otm /IV atm ) is 0.10, which roughly translates into a 10% change in IV otm /IV atm .11Ambrose, Cai, and Helwege (2012),Ellul, Jotikasthira, and Lundblad (2012) andChen et al (2014), among others, also analyze price pressure e↵ects in corporate bond markets associated with rating downgrades from IG to HY.…”

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confidence: 99%

Corporate Credit Risk Premia

Berndt

Douglas²,

Duffie

et al. 2018

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for research assistance, and to Linda Bethel and Sandra Berg for technical assistance. This paper is a comprehensive revision of our previous work, entitled "Measuring Default Risk Premia from Default Swap Rates and EDFs." The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research. At least one co-author has disclosed a financial relationship of potential relevance for this research. Further information is available online at http://www.nber.org/papers/w24213.ack NBER working papers are circulated for discussion and comment purposes. They have not been peer-reviewed or been subject to the review by the NBER Board of Directors that accompanies official NBER publications.

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“…From an operational perspective, the fund's regulation impose the forced sale of all securities that fall below IG regardless of any market price valuation and opportunity. For example, Ambrose et al (2012) argue that insurers sell FAs at a faster pace in response to regulatory pressure. This circumstance is common to the passive investment vehicles that track IG indices, as their investment objective is the full replication of the underlying index.…”

Section: Introductionmentioning

confidence: 99%

The Impact of Fallen Angels on Investment Grade Corporate Bonds Portfolios: Evidence From the European Market

2014

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This work examines the impact on the price of corporate bonds denominated in Euro of a downgrade to high yield announced by Standard & Poor’s and/or Moody’s Investors Service. In particular, we observe the bond price behaviour around three events. The first event is the first downgrade announcement from one of the rating agencies, and we find significant cumulative abnormal returns before and at around the event. The second event is the downgrade announcement by the second rating agency: in this case, the security becomes a fallen angel and must leave the institutional portfolios constrained to investment grade (IG) securities. We record again a significant negative price reaction but larger than in the previous case and significantly higher when preceded by a widening of the credit spread in the corporate bonds market. Broadening the existing literature, we perform a third event study, focused on the subsequent bond deletion from an IG benchmark. In this case, our results show positive and significant excess returns after the month-end index rebalancing, revealing a price reversal pattern of the fallen angel after its release from the index. This price rebound is the higher, whereas the stronger was the bond price pressure at the downgrade announcement. These insights offer some practical guideline for those professionals that manage IG and high-yield portfolios

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Fallen Angels and Price Pressure

Cited by 37 publications

References 38 publications

Institutional herding and its price impact: Evidence from the corporate bond market

Institutional herding and its price impact: Evidence from the corporate bond market

Corporate Credit Risk Premia

The Impact of Fallen Angels on Investment Grade Corporate Bonds Portfolios: Evidence From the European Market

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