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Article

Fallen Angels: Characteristics, Performance, and
Implications for Investors

Arik Ben Dor and Zhe Xu
The Journal of Fixed Income Spring 2011, 20 (4) 33-58; DOI: https://doi.org/10.3905/jfi.2011.20.4.033
Arik Ben Dor
is a director in the Quantitative Portfolio Strategy Group at Barclays Capital in New York City, NY.
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  • For correspondence: arik.bendor@barcap.com
Zhe Xu
is an associate in the Quantitative Portfolio Strategy Group at Barclays Capital in New York City, NY.
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  • For correspondence: jason.xu@barcap.com
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Abstract

This article examines the characteristics and price dynamics of fallen angels during a three-year period around their downgrade date. Consistent with the implications of forced selling, we find that after their downgrade, fallen angels initially underperform high-yield bonds with similar characteristics but then experience a subsequent reversal lasting up to two years after the rating change. Moreover, the magnitude of price recovery by individual issuers tends to increase with the size of their initial underperformance. We attribute the results to the increased capital charges for holding high-yield bonds imposed on insurance companies and the formulation of current investment mandates that often require investors to dispose of their holdings immediately after the downgrade. We discuss the implications of our findings for traditional credit investors as well as for absolute return investors.

  • Copyright © 2011 Barclays Capital Inc. All rights reserved. Not to be reproduced or redistributed without permission.
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The Journal of Fixed Income: 20 (4)
The Journal of Fixed Income
Vol. 20, Issue 4
Spring 2011
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Fallen Angels: Characteristics, Performance, and
Implications for Investors
Arik Ben Dor, Zhe Xu
The Journal of Fixed Income Mar 2011, 20 (4) 33-58; DOI: 10.3905/jfi.2011.20.4.033

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Fallen Angels: Characteristics, Performance, and
Implications for Investors
Arik Ben Dor, Zhe Xu
The Journal of Fixed Income Mar 2011, 20 (4) 33-58; DOI: 10.3905/jfi.2011.20.4.033
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  • Article
    • Abstract
    • DATA AND METHODOLOGY
    • PERFORMANCE DYNAMICS AROUND RATING EVENTS
    • INVESTING IN FALLEN ANGELS AS A STRATEGY
    • SUMMARY
    • ENDNOTES
    • REFERENCES
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