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Credit spread volatility, bond ratings and the risk reduction effect of watchlistings

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  • Volker G. Heinke

    (University of Augsburg, Augsburg, Germany)

Abstract

This article examines the relationship between the volatility of the credit risk premium of a plain vanilla bond and its credit rating. We calculate volatilities over different time windows and test for differences in the mean volatility depending on the bond rating. We check for the influence of further factors that are theoretically relevant for the explanation of the credit spread volatility. Moreover, we check the dynamic effect of rating changes on bond spread volatility. Finally, we test whether credit watchlistings influence credit spread volatility. We confirm prior studies in that, generally, credit ratings rank the risk of bonds according to credit spread volatility. We further find that rating changes have a dynamic influence on spread volatilities. Additionally it is shown that credit watchlistings significantly reduce the volatility. Thus, watchlistings are perceived to offer valuable information. Copyright © 2006 John Wiley & Sons, Ltd.

Suggested Citation

  • Volker G. Heinke, 2006. "Credit spread volatility, bond ratings and the risk reduction effect of watchlistings," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 11(4), pages 293-303.
    • Handle: RePEc:ijf:ijfiec:v:11:y:2006:i:4:p:293-303
    DOI: 10.1002/ijfe.275
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    References listed on IDEAS

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    1. Pinches, George E & Mingo, Kent A, 1973. "A Multivariate Analysis of Industrial Bond Ratings," Journal of Finance, American Finance Association, vol. 28(1), pages 1-18, March.
    2. Thompson, G Rodney & Vaz, Peter, 1990. "Dual Bond Ratings: A Test of the Certification Function of Rating Agencies," The Financial Review, Eastern Finance Association, vol. 25(3), pages 457-471, August.
    3. Reilly, Frank K & Joehnk, Michael D, 1976. "The Association between Market-Determined Risk Measures for Bonds and Bond Ratings," Journal of Finance, American Finance Association, vol. 31(5), pages 1387-1403, December.
    4. Steiner, Manfred & Heinke, Volker G, 2001. "Event Study Concerning International Bond Price Effects of Credit Rating Actions," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 6(2), pages 139-157, April.
    5. Richard Cantor & Kevin Cole & Frank Packer, 1997. "Split ratings and the pricing of credit risk," Research Paper 9711, Federal Reserve Bank of New York.
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    2. Shaozhen Chen & Bangqian Zhang & Jinjin Deng, 2018. "Research on Risk Measurement in Financial Market Based on GARCH-VaR and FHS¡ª¡ªAn Example of Chinese Bond Market," Applied Economics and Finance, Redfame publishing, vol. 5(4), pages 102-116, July.
    3. Bales, Kyle & Malikane, Christopher, 2020. "The effect of credit ratings on emerging market volatility," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 65(C).
    4. Huang, Alan G. & Kalimipalli, Madhu & Nayak, Subhankar & Ramchand, Latha, 2019. "Risk mitigation by institutional participants in the secondary market: Evidence from foreign Rule 144A debt market," Journal of Banking & Finance, Elsevier, vol. 99(C), pages 202-221.

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