The Review of Asset Pricing Studies Vol. 4 No. 2 2014

Rating-Based Investment Practices and Bond Market Segmentation

Zhihua Chen^1,2,3,4,5,6; Aziz A. Lookman^5,2,3,4,1,6; Norman Schürhoff^2,3,5,6,4,1; Duane J. Seppi^2,6,5,3,4,1

¹ Carnegie Mellon University · ² University of Lausanne · ³ McGill University · ⁴ Universität Innsbruck · ⁵ Swiss Finance Institute · ⁶ Shanghai University of Finance and Economics

Abstract

This paper documents a new channel for rating-based bond market segmentation, which, in contrast to prior research, is based on nonregulatory investment management practices. A 2005 Lehman Brothers index redefinition provides a quasinatural experiment in which a number of previously high-yield split-rated bonds were mechanically relabeled as investment grade. Although their regulatory standing was unaffected, these bonds had abnormal yield declines of 21 basis points. These valuation changes can be traced to buying by asset-class-sensitive institutional investors for whom these bonds became investable. Reputation, regulation, indexation, and liquidity cannot explain the observed price and trading patterns.

DOI

10.1093/rapstu/rau005

Volume

4

Issue

2

Pages

162-205

Language

en

Sources

openalex crossref bibtex:phds-export.bib

Cite

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