Momentum and the Cross-Section of Stock Volatility

Recent literature shows that momentum strategies exhibit significant downside risks over
certain periods, called "momentum crashes". We find that high uncertainty of momentum
strategy returns is sourced from the cross-sectional volatility of individual stocks. Stocks
with high realised volatility over the formation period tend to lose momentum effect. We
propose a new approach, generalised risk-adjusted momentum (GRJMOM), to mitigate
the negative impact of high momentum-specific risks. GRJMOM is proven to be more
profitable and less risky than existing momentum ranking approaches across multiple
asset classes, including the UK stock, commodity, global equity index, and fixed income
markets.

Keywords: Cross-sectional momentum, Momentum crashes, Generalised risk-adjusted momentum, Excess volatility, Volatility timing

JEL Classification: G11, G12, G13

Suggested Citation: Suggested Citation

Fan, Minyou and Kearney, Fearghal and Li, Youwei and Liu, Jiadong, Momentum and the Cross-Section of Stock Volatility (September 20, 2021). QMS Research Paper 2020/01 , Available at SSRN: https://ssrn.com/abstract=3541766 or http://dx.doi.org/10.2139/ssrn.3541766