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Financial Markets and Portfolio Management

, Volume 26, Issue 4, pp 449–468 | Cite as

Firm ratings, momentum strategies, and crises: evidence from the US and Taiwanese stock markets

  • Nicholas Rueilin Lee
Article

Abstract

This paper investigates whether there is a link between momentum profitability and firm ratings. We follow traditional and practical (non-) investment-grade classifications to divide into three rating groups, high, median, and non investment-grade group (HIG, MIG, and NIG) since firm ratings express risk in relative rank order to contain valuable information. This study considers the US and Taiwanese stock markets. We find that firm ratings momentum strategies can even earn positive profits, larger than naïve momentum, supporting that firm ratings can be used to strengthen naive momentum effects. By comparisons, the US firm ratings momentum with NIG produces larger profits than HIG but opposite in direction and V-shaped pattern in Taiwan. With an examination of crises on firm ratings momentum, we find that firm ratings momentum indeed helps increase the payoff during (non-)crises although firm ratings momentum profits should be strong following non-crises states and weak following crises states. However, firm ratings momentum profits partially result from the predictability of business cycle, calendar months, and information asymmetries. Our results highlight the critical importance of using firm ratings screens in empirical momentum studies.

Keywords

Firm ratings momentum Business cycle January effect Crises 

JEL Classification

C12 C51 G10 E44 

Notes

Acknowledgments

We thank the editor of FMPM and anonymous referees for their extremely helpful comments and suggestions on the original draft.

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Copyright information

© Swiss Society for Financial Market Research 2012

Authors and Affiliations

  1. 1.Department of FinanceChaoyang University of TechnologyTaichungTaiwan

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