PT  - JOURNAL ARTICLE
AU  - Friedrich-Carl Franz
TI  - The Index Effect in the Corporate Bond Market
AID  - 10.3905/jfi.2020.1.082
DP  - 2020 Jan 04
TA  - The Journal of Fixed Income
PG  - jfi.2020.1.082
4099  - https://pm-research.com/content/early/2020/01/04/jfi.2020.1.082.short
4100  - https://pm-research.com/content/early/2020/01/04/jfi.2020.1.082.full
AB  - 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 applicationsKey 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.