Rating labels and style investing: Evidence from Moody's rating recalibration

Document Type

Article

Publication Date

12-1-2021

Abstract

This paper investigates the role of style investing in comovement and return predictability. Using Moody's rating recalibration event to isolate the style effect, we find that changes in rating labels have powerful effects on comovement of municipal bond returns, trading activity, and volatility. Volatility-based comovement adds to the return comovement. Rating style investing induces return predictability and affects return formation, which interacts with investor sentiment. Shifts in the rating label drive these results through correlated trading activities, and the effects are reinforced by behavioral biases and trading frictions.

Identifier

85104157205 (Scopus)

Publication Title

Financial Management

External Full Text Location

https://doi.org/10.1111/fima.12348

e-ISSN

1755053X

ISSN

00463892

First Page

1047

Last Page

1084

Issue

4

Volume

50

Fund Ref

State University of New York

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