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Estimation of Stock Price Distress Costs Associated with Bond Downgrades Using Regime Switching Models.
Milidonis, Andreas, and Shaun Wang.
North American Actuarial Journal
, 11 (4): 42-60.
Publication year: 2007
We introduce a new risk measure to capture changes in the dynamics of stock returns when new information enters the market.
The risk measure is based on regime-switching processes.
Using corporate bond rating downgrades, we show a three-fold increase in volatility of respective stock returns starting on the day of the announcement.
The increase in volatility is persistent for about three days.