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Abstract
The author finds large and statistically significant abnormal returns of USD-denominated corporate bonds, which were up- or downgraded in the Bloomberg Barclays Investment Grade and High Yield Index from 2012 to 2018. Downgrades face a strong negative pre-announcement drift with a subsequent reversal. For upgrades, the drift is smaller in magnitude and the reversal non-existent. In contrast to the pre-announcement drift, the reversal seems to be related to price pressure, which is caused by index-linked trading. This hypothesis is supported by an analysis of actual ETF trading behavior with respect to credit rating changes.
TOPICS: Fixed income and structured finance, exchange-traded funds and applications
Key Findings
• There are large and statistically significant abnormal returns of USD-denominated corporate bonds, which were up- or downgraded in the Bloomberg Barclays Investment Grade and High Yield Index from 2012 to 2018.
• Downgrades face a strong negative pre-announcement drift with a subsequent reversal. For upgrades, the drift is smaller in magnitude and the reversal non-existent.
• In contrast to the pre-announcement drift, the reversal seems to be related to price pressure, which is caused by index-linked trading. This hypothesis is supported by an analysis of actual ETF trading behavior with respect to credit rating changes.
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US and Overseas: +1 646-931-9045
UK: 0207 139 1600