THE PRICE ADJUSTMENT PROCESS OF BONDS TO RATING RECLASSIFICATIONS: A TEST OF BOND MARKET EFFICIENCY

THE PRICE ADJUSTMENT PROCESS OF BONDS TO RATING RECLASSIFICATIONS: A TEST OF BOND MARKET EFFICIENCY 1 . PROCEDURE 1 A. Price Adjustment Process The expected yields of a bond will be forecast for its old and new rating classes for each of the twelve months prior to, the month of, and the five months subsequent to a rating change. The difference between the expected yields of the higher and lower rated classes is the “premium differential.” A ratio of the difference between the actual and the expected yield of the old rating class with respect to the premium differential is taken to determine Assistant Professor of Economics and Finance, Baruch College, C.U.N.Y. I am grateful to Paul Grier, Michael Keenan and William Silber for their helpful comments and suggestions. 1. See Cootner [51 for a fine anthology of studies done prior to 1964. For a more recent summary, see Fama [ ] S. . The Journal of Finance the extent a yield adjustment has taken place for each of the eighteen months under consideration. This procedure would be followed for all bonds whose ratings were changed for each of the eighteen months about a reclassification. Moreover, to get away from the idiosyncrasies of an individual bond, we will take an average of the http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png The Journal of Finance Wiley

THE PRICE ADJUSTMENT PROCESS OF BONDS TO RATING RECLASSIFICATIONS: A TEST OF BOND MARKET EFFICIENCY

The Journal of Finance, Volume 29 (2) – May 1, 1974

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Publisher
Wiley
Copyright
1974 The American Finance Association
ISSN
0022-1082
eISSN
1540-6261
D.O.I.
10.1111/j.1540-6261.1974.tb03069.x
Publisher site
See Article on Publisher Site

Abstract

1 . PROCEDURE 1 A. Price Adjustment Process The expected yields of a bond will be forecast for its old and new rating classes for each of the twelve months prior to, the month of, and the five months subsequent to a rating change. The difference between the expected yields of the higher and lower rated classes is the “premium differential.” A ratio of the difference between the actual and the expected yield of the old rating class with respect to the premium differential is taken to determine Assistant Professor of Economics and Finance, Baruch College, C.U.N.Y. I am grateful to Paul Grier, Michael Keenan and William Silber for their helpful comments and suggestions. 1. See Cootner [51 for a fine anthology of studies done prior to 1964. For a more recent summary, see Fama [ ] S. . The Journal of Finance the extent a yield adjustment has taken place for each of the eighteen months under consideration. This procedure would be followed for all bonds whose ratings were changed for each of the eighteen months about a reclassification. Moreover, to get away from the idiosyncrasies of an individual bond, we will take an average of the

Journal

The Journal of FinanceWiley

Published: May 1, 1974

References

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