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

Xinyuan Tao, Chunchi Wu

Research output: Contribution to journalArticlepeer-review

1 Scopus citations


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.

Original languageEnglish (US)
Pages (from-to)1047-1084
Number of pages38
JournalFinancial Management
Issue number4
StatePublished - Dec 1 2021

All Science Journal Classification (ASJC) codes

  • Accounting
  • Finance
  • Economics and Econometrics


  • behavioral biases
  • rating recalibration
  • return predictability
  • style investing
  • systematic risk and asset pricing


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