CDS Momentum: Slow-Moving Credit Ratings and Cross-Market Spillovers

Abstract This paper highlights the adverse consequences of sluggish credit rating updates in creating information efficiency distortions and investment anomalies. We first document significant default swap (CDS) return momentum yielding 7.1% per year. further show that cross-market strategies based on past CDS performance generates an alpha 10.3% year stocks 7.3% bonds. These effects are stronger among more liquid, informationally rich contracts whose spreads move anticipation important, yet slow-moving, changes. (JEL G12, G14) Received February 19, 2020; editorial decision July 10, 2020 by Editor Jeffrey Pontiff. Authors have furnished Internet Appendix, which is available Oxford University Press Web site next to link final published online.