Using Volatility to Improve Momentum Strategies
International Journal of Business and Social Science, Vol. 7, No. 7, July 2016
10 Pages Posted: 12 Dec 2016 Last revised: 18 Dec 2016
Date Written: July 7, 2016
This paper attempts to enhance momentum strategy by using volatility effect. To achieve this objective, double sorting portfolio is used and data is collected from 10 Arabic market indices over the period of 1990-2014. A simple modification to the traditional momentum strategy provides highly profitable results in Arabic market indices. While traditional momentum alone provides significant abnormal raw return of 1.16% per month over the six-month holding period, new momentum strategy based on double sort suggested by this study represented via recent winners with low-volatility outperform recent losers with high-volatility and it provides significant abnormal raw returns of 2.60% per month over the same holding period. Finally, either traditional momentum or momentum with volatility strategies can’t be explained by two factor model.
Keywords: Volatility, Momentum, Strategy, Two-Factor Model
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