Return-Generating Models - Simple Model or Advanced Model? The Case of Bond Rating Changes Announcement.

This paper compares the usability of return-generating models in detecting the abnormal returns of shares during the corporate bond rating change announcements by S&P and Moody’s for 10 years. These models are the market model, the quadratic model, the downside model and the higher-order downside model. Based on daily data, there was insufficient evidence to support the private information hypothesis during upgrade announcements using all the models. Hence, no conclusion on the performance of the return-generating models could be derived in relation to rating upgrades. During the downgrade announcements, the higher-order downside model was not found to perform at the same level as the other models. This indicates that even the simplest model, like the market model, is adequate to estimate the abnormal return of share prices. [ABSTRACT FROM AUTHOR]