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Discussion Paper

No. 2009-17 | March 03, 2009
The Information Content and Redistribution Effects of State and Municipal Rating Changes in Mexico

Abstract

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 Municipalities 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.

JEL Classification

C22 G14 G20 H74 H77

Cite As

Alfonso Mendoza-Velazquez (2009). The Information Content and Redistribution Effects of State and Municipal Rating Changes in Mexico. Economics Discussion Papers, No 2009-17, Kiel Institute for the World Economy. http://www.economics-ejournal.org/economics/discussionpapers/2009-17

Assessment



Comments and Questions


Prof. Dr. Urs Birchler - Referee Report 1
April 16, 2009 - 15:05

See attached file


Dr. Monika Trapp - Referee Report 2
May 06, 2009 - 13:36

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Alfonso Mendoza-Velazquez - Response to Referee Report 2
August 04, 2009 - 10:00

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Alfonso Mendoza-Velazquez - Response to Referee Report 1
August 04, 2009 - 10:07

See attached file