Momentum Crash, Credit Risk and Optionality Effects in Bear Markets and Crisis Periods: Evidence from the US Stock Market

18 Pages Posted: 22 Mar 2016 Last revised: 26 May 2016

See all articles by Klaus Grobys

Klaus Grobys

University of Vaasa; University of Jyväskyla

Date Written: April 7, 2016

Abstract

This study explores whether the credit risk anomaly exhibits option-like behavior similar to the momentum anomaly. Employing a market-timing regression model as in Daniel and Moskowitz (2013), it finds that the inverted credit risk spread indeed displays option-like behavior in bear market states. Unlike a momentum portfolio, which is effectively a short call option on the market, an inverted credit risk portfolio appears to be a long call option on the market. A strategy that invests 50% in credit risk and 50% in momentum does not exhibit any significant optionality effects in times of market stress.

Keywords: Credit risk, Optionality, Momentum, Bear market states, Financial crisis, trading strategy

JEL Classification: G12, G14

Suggested Citation

Grobys, Klaus, Momentum Crash, Credit Risk and Optionality Effects in Bear Markets and Crisis Periods: Evidence from the US Stock Market (April 7, 2016). Applied Economics Letters, Forthcoming, Available at SSRN: https://ssrn.com/abstract=2752994 or http://dx.doi.org/10.2139/ssrn.2752994

Klaus Grobys (Contact Author)

University of Vaasa ( email )

P.O. Box 700
Wolffintie 34
FIN-65101 Vaasa
Finland

University of Jyväskyla ( email )

Jyväskyla
Finland

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