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The Dynamics Of Bond Yield Spreads Around Rating Revision Dates

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  • Roy Batchelor
  • Katiuscia Manzoni

Abstract

We examine the effect of rating revisions on sterling Eurobond yields using a panel model with conditional heteroskedasticity that controls for event‐induced changes in the variance of spreads. Positive rating revisions are fully anticipated by the time the upgrade occurs. Negative revisions are only partially anticipated, and spreads on downgraded bonds rise for some time after the downgrade has been announced. This asymmetry is not apparent in a conventional event study model. All ratings announcements are accompanied by a temporary fall in yield volatility. We attribute this to the resolution of uncertainty about the true rating of the bond.

Suggested Citation

  • Roy Batchelor & Katiuscia Manzoni, 2006. "The Dynamics Of Bond Yield Spreads Around Rating Revision Dates," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 29(3), pages 405-420, September.
    • Handle: RePEc:bla:jfnres:v:29:y:2006:i:3:p:405-420
    DOI: 10.1111/j.1475-6803.2006.00186.x
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    Cited by:

    1. Christopher A. Hartwell & Paul M. Vaaler, 2023. "The Price of Empire: Unrest Location and Sovereign Risk in Tsarist Russia," Papers 2309.06885, arXiv.org, revised Nov 2023.
    2. Orlando, Giuseppe & Bufalo, Michele, 2022. "Modelling bursts and chaos regularization in credit risk with a deterministic nonlinear model," Finance Research Letters, Elsevier, vol. 47(PA).
    3. Alizadeh, Amir H. & Gabrielsen, Alexandros, 2013. "Dynamics of credit spread moments of European corporate bond indexes," Journal of Banking & Finance, Elsevier, vol. 37(8), pages 3125-3144.

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