RT Journal Article
SR Electronic
T1 The Index Effect in the Corporate Bond Market
JF The Journal of Fixed Income
FD Institutional Investor Journals
SP jfi.2020.1.082
DO 10.3905/jfi.2020.1.082
A1 Friedrich-Carl Franz
YR 2020
UL https://pm-research.com/content/early/2020/05/19/jfi.2020.1.082.abstract
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.