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 âpremium differential.â 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
The Journal of Finance – Wiley
Published: May 1, 1974
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