Information flow and credit rating announcements

Mehdi Khorram, Haitao Mo and Gary C. Sanger

Journal of Financial Markets, 2023, vol. 65, issue C

Abstract: We employ the implied volatility spread (IVS) and the short lending fee as measures of private information conveyed by their respective markets. Using issuer credit rating announcements as an informational event, we find that both IVS and the short fee have significantly higher predictive power for returns on event days versus non-event days. Both also predict the direction and magnitude of credit rating changes. Consistent with the linkage between the short sale and options markets, in models with both explanatory variables, the short fee remains significant in all specifications, while IVS loses explanatory power.

Keywords: Credit rating announcements; Implied volatility spread; Stock lending market; Options market; Return predictability (search for similar items in EconPapers)
JEL-codes: G10 G12 G14 (search for similar items in EconPapers)
Date: 2023
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Persistent link: https://EconPapers.repec.org/RePEc:eee:finmar:v:65:y:2023:i:c:s1386418123000356

DOI: 10.1016/j.finmar.2023.100837

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