Do Rating Agencies Confirm or Surprise the Market? Market Efficiency Hypothesis vs Conspiracy Theory.

45 Pages Posted: 3 May 2015

See all articles by Francesco Marchionne

Francesco Marchionne

Indiana University - Kelley School of Business - Department of Business Economics & Public Policy

Evelina Lazareva

Nottingham Business School

Date Written: May 1, 2015

Abstract

This paper examines the impact of credit ratings for sovereign bonds on bond price. We test whether credit rating agencies’ announcements surprise the market as predicted by the conspiracy theory or confirm what the market has priced already as postulated by the market efficiency hypothesis. We apply an event-parameter study to a CAPM-like model using a sample of 43 bond indexes over the period 1962-2013. The post-announcement reaction is three times larger than the pre-announcement adjustment, in particular for negative assessments. The relationship is stronger in Eurozone and intensifies since 2000. Our results are robust to different estimators, specifications, and variables definitions and weaken gradually with the increase in the event window size. This empirical evidence supports the conspiracy theory and is in line with the increasing power of credit rating agencies.

Keywords: Sovereign Bond, Ratings Agencies, Market Efficiency, Conspiracy Theory, Event Study

JEL Classification: G01, G10, G14, G24

Suggested Citation

Marchionne, Francesco and Lazareva, Evelina, Do Rating Agencies Confirm or Surprise the Market? Market Efficiency Hypothesis vs Conspiracy Theory. (May 1, 2015). Available at SSRN: https://ssrn.com/abstract=2601352 or http://dx.doi.org/10.2139/ssrn.2601352

Francesco Marchionne (Contact Author)

Indiana University - Kelley School of Business - Department of Business Economics & Public Policy ( email )

1309 East Tenth Street
Bloomington, IN 47405-1701
United States
01 812 855-3756 (Phone)

HOME PAGE: http://kelley.iu.edu/BEPP/Faculty/page14113.cfm?ID=47081

Evelina Lazareva

Nottingham Business School ( email )

Burton Street
NG1 4BU Nottingham
United Kingdom

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