Momentum and credit ratings
: a persistent relationship

  • Rodrigo Santos Neves (Student)

Student thesis: Master's Thesis

Abstract

This thesis investigates and broadens the relationship between momentum and credit rating. Momentum profitability is reliant upon low-grade firms and is non existent for high grade firms. Momentum payoffs from 1981 to 2021 are generated by low rated firms that account for less than 5% of the market capitalization of rated firms. The average credit rating of the winner and loser portfolio over the formation period are higher compared to the other 8 portfolios and create a U-shaped curve. The average credit rating of the portfolios for residual momentum forms a flatter U-shaped curve compared with normal momentum concluding that it takes fewer extreme positions compared with the original momentum. This thesis adds to the literature as it shows that these results are robust to the fact that credit rating agencies have, over time, become more conservative. Holding firm characteristics constant, I find that credit rating agencies have become more conservative by two notches after 1995 in comparison with the period between 1985 to 1995. This fact has no substantial impact for the relationship between momentum profitability and credit rating as they are still generated by low rated firms that account for less than 2% of the market capitalization of rated firms.
Date of Award15 Oct 2024
Original languageEnglish
Awarding Institution
  • Universidade Católica Portuguesa
SupervisorMário Meira (Supervisor)

Keywords

  • Credit ratings
  • Momentum
  • Residual momentum
  • Credit rating agencies

Designation

  • Mestrado em Finanças (mestrado internacional)

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