RT Journal Article
SR Electronic
T1 Fallen Angels: Characteristics, Performance, and
Implications for Investors
JF The Journal of Fixed Income
FD Institutional Investor Journals
SP 33
OP 58
DO 10.3905/jfi.2011.20.4.033
VO 20
IS 4
A1 Arik Ben Dor
A1 Zhe Xu
YR 2011
UL https://pm-research.com/content/20/4/33.abstract
AB This article examines the characteristics and price dynamics of fallen angels during a three-year period around their downgrade date. Consistent with the implications of forced selling, we find that after their downgrade, fallen angels initially underperform high-yield bonds with similar characteristics but then experience a subsequent reversal lasting up to two years after the rating change. Moreover, the magnitude of price recovery by individual issuers tends to increase with the size of their initial underperformance. We attribute the results to the increased capital charges for holding high-yield bonds imposed on insurance companies and the formulation of current investment mandates that often require investors to dispose of their holdings immediately after the downgrade. We discuss the implications of our findings for traditional credit investors as well as for absolute return investors.TOPICS: Fixed-income portfolio management, information providers/credit ratings, exchanges/markets/clearinghouses