Source: Avramov, Chordia, Jostova & Philipov (2007) · The Journal of Finance · DOI: 10.1111/j.1540-6261.2007.01282.x
TL;DR
Momentum profits live almost entirely in low-credit-quality firms. Among high-grade firms momentum is statistically and economically nonexistent (~0.07–0.27%/month, insignificant); the profits documented in the literature are generated by low-rated firms that make up under 4% of the total market cap of rated firms. The credit-rating split is not explained by size, age, analyst dispersion, leverage, or volatility — momentum lives in the riskiest, hardest-to-arbitrage corner of the market.
What anomaly it documents
Predictor: prior 6-month return, conditioned on issuer credit rating (S&P).
Direction: momentum positive among low-grade firms; absent among high-grade.
Shape: payoff differential driven by a tiny, low-quality slice; high-grade momentum ~0.07–0.27%/month (insignificant) vs large and significant for low-grade.
OSAP predictor: Mom6mJunk.
How to construct it
Sorting variable: prior 6-month return, within credit-rating groups.
Universe: S&P-rated NYSE/AMEX/Nasdaq common stocks (sample 1985–2003).
Portfolio formation: momentum deciles, partitioned by credit rating.
Long / short: long winners / short losers, concentrated in low-grade firms.
Weighting: equal-weighted.
Rebalancing: monthly, 6-month holding.
Evidence and replication
Period
Notes
Source
1985–2003
momentum significant only in low-grade firms (<4% of rated market cap)
Limits to arbitrage: low-grade firms are illiquid, volatile, and costly to short, so mispricing persists; loser/winner fundamentals (margins, sales growth, cash flow, interest coverage) deteriorate/improve over the formation and holding periods.
Information uncertainty: opaque, distressed firms have slower price discovery.
Limitations and risks
Tradeability: the profits sit in the least liquid, hardest-to-short names.
Crash risk: distressed-firm momentum is especially crash-prone.
Capacity: the tiny market-cap share caps scalability.
Key references
Avramov, D., Chordia, T., Jostova, G. & Philipov, A. (2007) — Momentum and Credit Rating — Journal of Finance — DOI: 10.1111/j.1540-6261.2007.01282.x
Jegadeesh, N. & Titman, S. (1993) — Returns to Buying Winners and Selling Losers — JF
Provenance: verified/generated from the paper's full text.
