Momentum Crashes and Variations to Market Liquidity

41 Pages Posted: 14 Jan 2019

See all articles by Hilal Anwar Butt

Hilal Anwar Butt

University of Karachi - Institute of Business Administration (IBA), Karachi

Nader Virk

Swansea University School of Management; Hanken School of Economics - Department of Finance and Statistics; University of Plymouth; Hanken School of Economics

Date Written: January 11, 2019

Abstract

We document that the variation in market liquidity is an important determinant of momentum crashes that is independent of other known explanations surfaced on this topic. This relationship is driven by the asymmetric large return sensitivity of short-leg of momentum portfolio to changes in market liquidity that flares the tail risk of momentum strategy in panic states. This identification explains the forecasting ability of known predictors of tail risk of momentum strategy such that the contemporaneous increase in market liquidity predominantly sums up the trademark negative relationship between predictors and future momentum returns. Our results are robust using a different momentum portfolio and alternative measures of market liquidity that make a substantial part of the common source of variation in aggregate liquidity.

Keywords: market liquidity, momentum crashes, tail risk, predictors

JEL Classification: G10, G12, G15

Suggested Citation

Butt, Hilal Anwar and Virk, Nader, Momentum Crashes and Variations to Market Liquidity (January 11, 2019). Available at SSRN: https://ssrn.com/abstract=3314095 or http://dx.doi.org/10.2139/ssrn.3314095

Hilal Anwar Butt (Contact Author)

University of Karachi - Institute of Business Administration (IBA), Karachi ( email )

University Road
Karachi, Sindh 75270
Pakistan

Nader Virk

Swansea University School of Management ( email )

Haldane Building
Singleton Park
Swansea, SA2 8PP
United Kingdom

Hanken School of Economics - Department of Finance and Statistics ( email )

FI-00101 Helsinki
Finland

University of Plymouth ( email )

Drake Circus
Plymouth, Devon PL48AA
United Kingdom

Hanken School of Economics ( email )

P.O. Box 479
Helsinki, Helsinki 00101
Finland

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