Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/28251 
Year of Publication: 
2009
Citation: 
[Journal:] Economics: The Open-Access, Open-Assessment E-Journal [ISSN:] 1864-6042 [Volume:] 3 [Issue:] 2009-38 [Publisher:] Kiel Institute for the World Economy (IfW) [Place:] Kiel [Year:] 2009 [Pages:] 1-21
Publisher: 
Kiel Institute for the World Economy (IfW), Kiel
Abstract: 
The fiscal and financial reforms carried out in Mexico in 2000 have encouraged a widespread presence of rating agencies and have allowed several States and Municipalities to raise funds through bond offerings in the capital market. Any local government in Mexico intending to access credit and capital markets must count with at least one credit rating from one of the three main agencies: FitchRatings, Moody's and Standard & Poor's. This paper investigates the impact of rating changes to State and Municipal governments on bond returns in Mexico. By employing a Capital Asset Pricing Model (CAPM) structure for the mean equation that allows conditional volatility, we find strong support for the Information Content Signaling Hypothesis (ICSH), i.e., rating upgrades (downgrades) are followed by greater (lower) bond returns. We also find some support for the Wealth Redistribution Hypothesis (WRH) indicating that rating upgrades (downgrades) are followed by lower (greater) bond returns. In addition to this, we find high volatility persistence, significant asymmetric responses of volatility to bad and good news, a negative association between market volatility and the level of bond returns and significant effects of volatility in response to rating changes. Finally, the estimations show the market anticipates and responds to rating changes within five-day momentum windows. There is a comparatively stronger reaction of returns on the event day favoring the hypothesis of market inefficiency.
Subjects: 
Credit rating changes
municipal bond returns
CAPM
EGARCH-in-Mean
JEL: 
C22
G14
G20
H74
H77
Persistent Identifier of the first edition: 
Creative Commons License: 
cc-by-nc Logo
Document Type: 
Article

Files in This Item:
File
Size
312.97 kB





Items in EconStor are protected by copyright, with all rights reserved, unless otherwise indicated.