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Information Transfer Effects of Bond Rating Downgrades
Author(s) -
Jorion Philippe,
Zhang Gaiyan
Publication year - 2010
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.1540-6288.2010.00266.x
Subject(s) - credit rating , equity (law) , bond , monetary economics , competition (biology) , bond credit rating , portfolio , contagion effect , economics , business , financial economics , credit risk , financial system , actuarial science , finance , financial crisis , ecology , macroeconomics , political science , law , credit reference , biology
This paper investigates information transfer effects of bond rating downgrades measured by equity abnormal returns for industry portfolios. Industry rivals can be subject to two opposing effects, the contagion effect and the competition effect. We find that the net effect is strongly dependent on the original bond rating of the downgraded firm. For investment‐grade (speculative‐grade) firms, industry abnormal equity returns are negative (positive), which implies a predominant contagion (competition) effect. The analysis reveals a rich pattern of positive and negative correlations across negative credit events, which can be used to improve our understanding of portfolio credit risk models.