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