Another Look at Value and Momentum: Volatility Spillovers

Review of Quantitative Finance and Accounting, Forthcoming

44 Pages Posted: 16 Mar 2017 Last revised: 27 Mar 2020

See all articles by Klaus Grobys

Klaus Grobys

University of Vaasa; University of Jyväskyla

Sami Vähämaa

University of Vaasa

Date Written: September 5, 2019

Abstract

This paper examines volatility interdependencies between value and momentum returns. Using U.S. data over the period 1926-2015, we document persistent periods of low and high volatility spillovers between value and momentum strategies. Moreover, we find that the intensity of the volatility spillovers may change substantially in very short periods of time and that these shifts in spillover intensity can be linked to prominent economic events and financial market turmoil. Our results further demonstrate that value returns increase and momentum returns decrease monotonically with increasing volatility spillovers between the two strategies. Given this linkage between spillover intensity and returns, we propose a simple trading strategy which utilizes a volatility spillover index for allocating funds between value and momentum portfolios. The proposed trading strategy outperforms value and momentum strategies and generates payoffs that are not subject to option-like behavior.

Keywords: Asset pricing, value effect, momentum effect, volatility spillovers, volatility spillover index

JEL Classification: G12, G14

Suggested Citation

Grobys, Klaus and Vähämaa, Sami, Another Look at Value and Momentum: Volatility Spillovers (September 5, 2019). Review of Quantitative Finance and Accounting, Forthcoming, Available at SSRN: https://ssrn.com/abstract=2932122 or http://dx.doi.org/10.2139/ssrn.2932122

Klaus Grobys

University of Vaasa ( email )

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

University of Jyväskyla ( email )

Jyväskyla
Finland

Sami Vähämaa (Contact Author)

University of Vaasa ( email )

P.O. Box 700
Vaasa, FI-65101
Finland
+358 29 449 8455 (Phone)

HOME PAGE: http://www.uva.fi/~sami

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