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

Using 5-year credit default swap (CDS) contracts on 1,247 U.S. firms from 2003 2011, we show a 3-month formation and 1-month holding period CDS momentum strategy yields 52 bps per month. By incorporating past CDS return signals, we further show traditional stock momentum strategies avoid abrupt losses during the crisis period and improve their performance by net 104 bps per month. Both within CDS market and across CDS-to-stock market momentum profits exist because CDS returns correctly anticipate future credit rating changes. Our results highlight the adverse effects of sluggish rating updates in creating information efficiency distortions and investment anomalies. JEL Classification: G12, G14