The Information Content and Redistribution Effects of State and Municipal Rating Changes in Mexico

Arbeitspapier

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 unicipalities 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.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: Economics Discussion Papers ; No. 2009-17

Classification and Topics

• Classification: Wirtschaft ; Information and Market Efficiency; Event Studies; Insider Trading ; State and Local Borrowing ; Intergovernmental Relations; Federalism; Secession ; Single Equation Models; Single Variables: Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes ; Financial Institutions and Services: General
• Subject: Credit rating changes ; municipal bond returns ; CAPM ; EGARCH-in-Mean ; Kommunalobligation ; Öffentliche Anleihe ; Rendite ; Kreditwürdigkeit ; Capital Asset Pricing Model ; Informationswert ; Vermögenseffekt ; Schätzung ; Mexiko

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Mendoza-Velázquez, Alfonso
• Event: Veröffentlichung
• (who): Kiel Institute for the World Economy (IfW)
• (where): Kiel
• (when): 2009

Further information

• Handle: http://hdl.handle.net/10419/27498
• Last update: 10.03.2025, 11:44 AM CET