Credit rating agencies and unsystematic risk: Is there a linkage?

Pilar Abad and M. Dolores Robles Fernandez

No 2012-17, Documentos de Trabajo del ICAE from Universidad Complutense de Madrid, Facultad de Ciencias Económicas y Empresariales, Instituto Complutense de Análisis Económico

Abstract: This study analyzes the effects of six different credit rating announcements on systematic and unsystematic risk in Spanish companies listed on the Electronic Continuous Stock Market from 1988 to 2010. We use an extension of the event study dummy approach that includes direct effects on beta risk and on volatility. We find effects in both kinds of risk, indicating that rating agencies provide information to the market. Rating actions that imply an improvement in credit quality cause lower systematic and unsystematic risk. Conversely, ratings announcements that imply credit quality deterioration cause a rebalance in both types of risk, with higher beta risk being joined with lower diversifiable risk. Although the event characteristics were not important to determine how the two types of risk reacted to rating actions, the 2007 economic and financial crises increase the market’s sensitivity to these characteristics.

Keywords: Credit rating agencies; Rating changes; Market model; GARCH; Stock Returns; Systematic risk; Unsystematic The information provided by Fitch and Moody’s is appreciated. Any errors are solely the responsibility of the authors. This work has been funded by the Spanish Ministerio de Ciencia y Tecnología (ECO2009-10398/ECON and ECO2011-23959); Junta de Comunidades de Castilla-La Mancha (PCI08-0089) and Banco de Santander (UCM940063). (search for similar items in EconPapers)
JEL-codes: C22 G12 G14 G24 (search for similar items in EconPapers)
Pages: 34 pages
Date: 2012-07
New Economics Papers: this item is included in nep-ban and nep-rmg
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