Market Volatility and Momentum

37 Pages Posted: 17 Mar 2009 Last revised: 23 Nov 2009

See all articles by Kevin Q. Wang

Kevin Q. Wang

University of Toronto - Joseph L. Rotman School of Management

Jianguo Xu

McGill University

Date Written: November 2009


This paper investigates time-series predictability of momentum. Taking a hint from the drastic 2008-2009 episode, we examine whether market volatility is linked to momentum. We find that market volatility indeed has significant and robust predictive power for momentum profits, especially in negative market states. In contrast to the cross-sectional relation that momentum profitability is higher among firms with higher information uncertainty or higher default risk, our tests show that volatile down markets forecast low momentum payoffs. The time-series predictability of momentum is asymmetric, which arises from loser stocks. Jointly, these new findings raise a tough challenge to the existing theories on momentum. We explore whether default risk in down markets is related to the predictive power of market volatility and find supportive evidence.

Keywords: Market volatility, momentum effect, time-series predictability of momentum, asymmetric predictability, default risk, volatile down markets, realized volatility

Suggested Citation

Wang, Kevin Q. and Xu, Jianguo, Market Volatility and Momentum (November 2009). Available at SSRN: or

Kevin Q. Wang (Contact Author)

University of Toronto - Joseph L. Rotman School of Management ( email )

105 St. George Street
Toronto, Ontario M5S 3E6
416 946 5059 (Phone)
416 971 3048 (Fax)

Jianguo Xu

McGill University ( email )

1001 Sherbrooke St. W
Montreal, Quebec H3A 1G5

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