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Do bond credit ratings lead to excess comovement?

Louis Raffestin

Journal of Banking & Finance, 2017, vol. 85, issue C, 41-55

Abstract: We investigate whether non-fundamental comovement results from investors using credit ratings to group assets into different “styles”. We find that bonds that join a new rating class start comoving more with the bonds in this class, even when fundamental factors suggest otherwise. We show that this comovement effect varies according to the nature of the bond considered, and the modalities of the rating action. Downgrades have a larger impact than upgrades, and rating reviews matter as much as actual movements. Finally, rating changes between grades BBB and BB, which lead bonds to be reclassified as either “high-yield” or “investment grade” assets, seem to be of particular importance.

Keywords: Style investing; Bond ratings; Comovement (search for similar items in EconPapers)
JEL-codes: G11 G12 G14 G24 D83 F30 (search for similar items in EconPapers)
Date: 2017
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Working Paper: Do bond credit ratings lead to excess comovement? (2017)
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Handle: RePEc:eee:jbfina:v:85:y:2017:i:c:p:41-55