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THE IMPACT OF SPLIT BOND RATINGS ON RISK PREMIA
Author(s) -
Liu Pu,
Moore William T.
Publication year - 1987
Publication title -
financial review
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.621
H-Index - 47
eISSN - 1540-6288
pISSN - 0732-8516
DOI - 10.1111/j.1540-6288.1987.tb00319.x
Subject(s) - bond , bond market , bond credit rating , bond valuation , economics , credit rating , quality (philosophy) , yield (engineering) , actuarial science , monetary economics , business , credit risk , financial economics , econometrics , finance , materials science , metallurgy , philosophy , epistemology , credit reference
Interest rates for bonds are negatively correlated with credit ratings assigned by agencies such as Moody's Investor Service and Standard & Poor's. Still in dispute is whether or not the ratings themselves convey information that is reflected in prices, hence interest rates in the bond markets. Disagreement between these two agencies' ratings leads to “split” ratings, and in this paper, the authors use the phenomenon of split ratings to assess whether or not ratings have a separate impact on bond prices. The results indicate that a downside split appears to have greater bond yield impact than an upside split. The findings are inconsistent with bond market efficiency, at least in the strong form. The market considers the quality of a split‐rated bond to reflect the lower of the two ratings. Finally, the symmetry of the results with respect to the ratings agencies indicates that neither agency has more influence than the other in determining bond yields.