Information Content of Credit Rating Changes: Evidence from Trading Volume Using a New Nonparametric Test

• Activity Number: 683
• Type: Contributed
• Date/Time: Thursday, August 13, 2015 : 10:30 AM to 12:20 PM
• Sponsor: Business and Economic Statistics Section
• Author(s): Andrew Siegel* and Jonathan Brogaard and Jennifer L. Koski
• Companies: University of Washington and University of Washington and University of Washington
• Keywords: Bond Market Volume

Abstract

Prior research examines the information content of credit rating changes using returns in the stock, bond or credit default swap markets. Results are mixed, generally showing a significant reaction to downgrades with much weaker results for upgrades. These tests are limited by lack of data, liquidity screens that greatly reduce the sample size, and ambiguous predictions. We extend prior research using abnormal trading volume. Because trading volume is highly non-normally distributed (especially in the bond market), we derive a new nonparametric test statistic that can be used to test abnormal volume in other applications. Our results show significant abnormal volume in both the stock and bond markets around upgrades and downgrades, consistent with the information content of credit ratings.