THE DYNAMICS OF BOND YIELD SPREADS AROUND RATING REVISION DATES

Roy Batchelor () and Katiuscia Manzoni

Journal of Financial Research, 2006, vol. 29, issue 3, 405-420

Abstract: We examine the effect of rating revisions on sterling Eurobond yields using a panel model with conditional heteroskedasticity that controls for event‐induced changes in the variance of spreads. Positive rating revisions are fully anticipated by the time the upgrade occurs. Negative revisions are only partially anticipated, and spreads on downgraded bonds rise for some time after the downgrade has been announced. This asymmetry is not apparent in a conventional event study model. All ratings announcements are accompanied by a temporary fall in yield volatility. We attribute this to the resolution of uncertainty about the true rating of the bond.

Date: 2006
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