Abstract
We employ the implied volatility spread (IVS) and the short lending fee as measures of private information conveyed by their respective markets. Using credit rating announcements as an informational event, we find that both IVS and the short fee have significantly higher predictive power for returns on event days versus non-event days. Both IVS and the short fee also predict the direction and magnitude of credit rating changes. Options order imbalance (OIB) does not explain the results. In models with both explanatory variables, the short fee remains significant in all specifications, while IVS loses explanatory power.
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