Firm Ratings, Momentum Investing Strategy, and Market Crisis : Evidence from US and Taiwan Markets

This paper considers a link between momentum profitability and firm ratings. Credit risks for naïve momentum strategies present a U-shaped pattern across momentum portfolios. Due to firms ratings containing valuable information and predicting the cross-sectional stock returns, firm ratings based momentum strategies can even earn positive profits, larger than naïve momentum strategies. Specifically, a comparison of firm ratings momentum in both US and Taiwan markets suggest different risk preference where investors in US prefer stocks with higher risk while those in Taiwan prefer stocks with lower risk. Additionally, firm ratings can be used to strengthen naive momentum effects. Next, firm ratings momentum profits partially result from the predictability of macroeconomic factors and non-January months. Moreover, firm ratings may independently explain the momentum effects not captured by factors that proxy for information asymmetries. Finally, with an examination of the 2007 subprime crisis on the firm ratings momentum, we find that firm ratings momentum indeed helps increase the payoff during the period for the crisis, especially for middle investment-grade group in US market