The Impact of the Stock Market on Bond Rating Changes (2013)

This MSc international finance research project looks at the impact that the downgrade of a company or government credit rating has on the price of its bond in the days prior to, during and immediately after the downgrade. Supposing that the downgrade information is taken as negative news, then a fall in the stock price would be the expected reaction. However, if we assume that the equity investors already have access to the CRAs information, then there would be no impact in the stock market.

Despite this, some limited impact might be felt because bad news or downgrade has a way of affecting the market sentiments. In order to perform this analysis, this thesis used an event study technique that tried to identify the impact of the downgrade on a particular variable. From the analysis I found out that there were no statistically significant abnormal returns on the days surrounding the downgrade. I also found out that the information resulting from the downgrade seems to have been factored into the stock price.

This MSc project will focus on EU member countries and investigate their interactions within the bond markets. The data used will include bond and stock index returns for the countries under study. The daily data for CDSs and sovereign bond yields will be used to determine the impact of S&Ps announcements on these financial instruments. As will be discussed ion chapter two of this discourse, in the literature review section, certain studies will be presented to support the assertion that negative information caused more reaction in the financial markets compared to negative information. On the basis of this discovery, I asked three questions that will form the research questions for this project. Research questions;

  • What is the information content of bond rating downgrade?
  • Have equity investors been priced in the deterioration that occasioned the bond degradation?
  • Are equity markets faster in their response to changes in a firm’s capital structure than the CRAs and specifically S&P rating agency?
  • Does the bond rating and changes in these ratings impact the bond markets in the EU?
  • 7,000 words – 40 pages in length
  • Good use of literature
  • Excellent analysis of subject area
  • Well written throughout
  • Ideal for finance students
  • This is an assignment and not a dissertation

1: Introduction
An Overview of the EU Financial Markets
Purpose of the project
Structure of the project
Research questions

2: Literature Review
Factors behind Sovereign Rating Itself
The Impact of Sovereign Credit Rating on Financial Markets

3: Methodology
Event Study
Selection and Distribution of Rating Events
Event study
Simple regression

4: Results and Analysis
Three Day Event Window
Five Day Event Window

5: Conclusion



Impact of the Stock Market on Bond Rating Changes Dissertation
Impact of the Stock Market on Bond Rating Changes Dissertation

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