Risk-Managed Industry Momentum and Momentum Crashes

Abstract

This paper investigates Barosso and Santa-Clara’s (2015) risk-managed momentum strategy in an industry momentum setting. We investigate several traditional momentum strategies including that recently proposed by Novy-Marx (2012). We moreover examine the impact of different variance forecast horizons on average payoffs and also Daniel and Moskowitz’s (2016) optionality effects. Our results show in general that neither plain industry momentum strategies nor the risk-managed industry momentum strategies are subject optionality effects, implying that these strategies have no time-varying beta. Moreover, the benefits of risk management are robust across volatility estimators, momentum strategies and subsamples. Finally, the “echo effect” in industries is not robust in subsamples as the strategy works only during the most recent subsample.

Keywords: asset pricing, momentum crash, industry momentum, optionality effect

JEL Classification: G12, G14