THE EFFECT OF RATING CHANGE, WATCHLIST REVIEW AND RATING OUTLOOK ON US CORPORATE BOND PRICES

Abstract

This paper study the affect of rating changes, Watchlist review and rating outlooks on the US corporate bond market from 1994 to 2006. Using Moody’s rating event databases, this paper finds that bond prices respond to rating changes and Watchlist reviews during the event window, especially for downgrades. Non-investment grade bonds also exhibit higher price volatility during these events. Besides that, the results also show that Moody’s effort in reducing the effect of volatility in rating changes has some effect on the bond price. I conduct a cross sectional study on the abnormal returns and identify that last ratings, size of bonds and embedded call options will affect the performance of bonds during rating events.