Title: Liquidity and the size of trades around credit event news
Authors: Ana Escribano - Universidad de Castilla-La Mancha (Spain) [presenting]
M Dolores Robles - Universidad Complutense de Madrid (Spain)
Pilar Abad - Universidad Rey Juan Carlos (Spain)
Antonio Diaz - Universidad de Castilla-La Mancha (Spain)
Abstract: The aim is to investigate the impact of credit rating downgrades on the liquidity and trading behavior of both segments of trading, the institutional and the retail sized ones, in the U.S. corporate bond market. Using the TRACE dataset, we analyze the information content of these events and potential information asymmetries, distinguishing between trade sizes. We propose two additional hypotheses: the regulatory constraints and the risk tolerance limits that may force some institutional and retail bondholders to sell after certain downgrades. Our results show trading anticipation before downgrades that is consistent with the existence of both types of investors, informed and uninformed. We also observe fire sales and price concessions depending on rating specific regulatory constraints, capital requirements and risk tolerance limits.