Momentum and the Cross-Section of Stock Volatility

58 Pages Posted: 21 Feb 2020 Last revised: 21 Sep 2021

See all articles by Minyou Fan

Minyou Fan

Queen's University Belfast, Queen's Management School

Fearghal Kearney

Queen's University Belfast - Queen's Management School

Youwei Li

Hull University Business School

Jiadong Liu

Queen's University Belfast - Queen's Management School

Multiple version iconThere are 2 versions of this paper

Date Written: September 20, 2021

Abstract

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

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

Minyou Fan

Queen's University Belfast, Queen's Management School ( email )

Riddle Hall
185 Stranmillis Road
Belfast, BT9 5EE
United Kingdom

Fearghal Kearney

Queen's University Belfast - Queen's Management School ( email )

Riddel Hall
185 Stranmillis Road
Belfast, BT9 5EE
United Kingdom

Youwei Li

Hull University Business School ( email )

University of Hull
Hull, HU6 7RX
United Kingdom

Jiadong Liu (Contact Author)

Queen's University Belfast - Queen's Management School ( email )

Riddel Hall
185 Stranmillis Road
Belfast, BT9 5EE
United Kingdom

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