Momentum and the Cross-section of Stock Volatility

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

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, 144, 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: Nov 1, 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
• Volume: 144
• 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