CREDIT RATING MATTERS IN CONTRARIAN RETURN : EVIDENCE FROM THE JAPANESE EQUITY MARKET

Abstract

Although previous research has reported that the momentum strategy is effective in the US equity market, the contrarian strategy is effective in the Japanese equity market. The current research illuminates the relationship between the return found with the contrarian strategy (contrarian return) and credit rating in the Japanese equity market. We empirically verify the relationship between these, as well as the relationship between the factors explaining credit rating and the contrarian return. Furthermore, dividing the expected contrarian return into three components following Lo and MacKinlay (1990), we closely examine the relationship between each component and the credit rating. In the analyses on the contrarian return, the influence by the business cycle is also discussed. Lastly, we examine whether the contrarian return still exists after removing the return generated by market risk factor.