Aggregate Volatility Risk and Momentum Returns

80 Pages Posted: 11 Jun 2012 Last revised: 6 Jun 2018

See all articles by Efdal Misirli

Efdal Misirli

Federal Reserve Banks - Quantitative Supervision & Research

Date Written: October 2017

Abstract

Momentum stocks are exposed to aggregate volatility risk. This paper estimates an EGARCH model of market volatility to introduce a new volatility risk factor that prices itself, and thereby becomes a candidate risk factor for analyzing stock market anomalies such as momentum. Winners have negative loadings on this new volatility factor, whereas losers have positive loadings. Since volatility risk carries a negative price of risk, the new factor helps explain 81% of momentum profits. The paper also rationalizes the volatility risk exposures of momentum portfolios and the short life of profits using event studies and growth option arguments.

Keywords: Momentum, aggregate volatility, growth options, corporate investment, event study

JEL Classification: G12, G14

Suggested Citation

Misirli, Efdal, Aggregate Volatility Risk and Momentum Returns (October 2017). Available at SSRN: https://ssrn.com/abstract=2080638 or http://dx.doi.org/10.2139/ssrn.2080638

Efdal Misirli (Contact Author)

Federal Reserve Banks - Quantitative Supervision & Research ( email )

United States

HOME PAGE: http://https://www.richmondfed.org/banking/qsr/misirli

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