Information flow and credit rating announcements

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...

Full description

Saved in:
Bibliographic Details
Published in:Journal of financial markets (Amsterdam, Netherlands) Netherlands), 2023-09, Vol.65, p.100837, Article 100837
Main Authors: Khorram, Mehdi, Mo, Haitao, Sanger, Gary C.
Format: Article
Language:English
Subjects:
Credit rating announcements
Implied volatility spread
Options market
Return predictability
Stock lending market
Citations: Items that this one cites
Online Access:Get full text
Tags: Add Tag
No Tags, Be the first to tag this record!
Description
Summary: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. •The implied volatility spread and the stock lending fee strongly predict issuers' stock returns around issuer credit rating announcements.•The predictive information relevant for credit rating events originates from the stock lending market.
ISSN:1386-4181
1878-576X
DOI:10.1016/j.finmar.2023.100837