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 46
OP 69
DO 10.3905/jfi.2020.1.082
VO 30
IS 1
A1 Friedrich-Carl Franz
YR 2020
UL https://pm-research.com/content/30/1/46.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 preannouncement drift with a subsequent reversal. For upgrades, the drift is smaller in magnitude and the reversal nonexistent. In contrast to the preannouncement 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 exchange-traded fund trading behavior with respect to credit rating changes.TOPICS: Exchange-traded funds and applications, fixed income and structured financeKey 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 preannouncement drift with a subsequent reversal. For upgrades, the drift is smaller in magnitude and the reversal nonexistent.• In contrast to the preannouncement 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.