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Momentum and the Cross-section of Stock Volatility

Fan, Minyou; Kearney, Fearghal; Li, Youwei; Liu, Jiadong

Authors

Minyou Fan

Fearghal Kearney

Jiadong Liu



Abstract

Recent literature shows that momentum strategies exhibit significant downside risks over certain periods, called “momentum crashes”. We find that high uncertainty of momentum strategy returns is sourced from the cross-sectional volatility of individual stocks. Stocks with high realised volatility over the formation period tend to lose momentum effect. We propose a new approach, generalised risk-adjusted momentum (GRJMOM), to mitigate the negative impact of high momentum-specific risks. GRJMOM is proven to be more profitable and less risky than existing momentum ranking approaches across multiple asset classes, including the UK stock, commodity, global equity index, and fixed income markets.

Citation

Fan, M., Kearney, F., Li, Y., & Liu, J. (2022). Momentum and the Cross-section of Stock Volatility. Journal of Economic Dynamics and Control, Article 104524. https://doi.org/10.1016/j.jedc.2022.104524

Journal Article Type Article
Acceptance Date Sep 9, 2022
Online Publication Date Sep 13, 2022
Publication Date 2022
Deposit Date Sep 13, 2022
Publicly Available Date Sep 15, 2022
Journal Journal of Economic Dynamics and Control
Print ISSN 0165-1889
Publisher Elsevier
Peer Reviewed Peer Reviewed
Article Number 104524
DOI https://doi.org/10.1016/j.jedc.2022.104524
Keywords Cross-sectional momentum; Momentum crashes; Generalised risk-adjusted momentum; Excess volatility; Volatility timing
Public URL https://hull-repository.worktribe.com/output/4076266
Publisher URL https://www.sciencedirect.com/science/article/pii/S0165188922002287

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