Momentum Crashes and Variations to Market Liquidity

41 Pages Posted: 14 Jan 2019

See all articles by Hilal Butt

Hilal Butt

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

Nader Virk

University of Plymouth

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 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 Butt (Contact Author)

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

University Road
Karachi, Sindh 75270
Pakistan

Nader Virk

University of Plymouth ( email )

Drake Circus
Plymouth, Devon PL22QZ
United Kingdom

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