Momentum and the Cross-Section of Stock Volatility

47 Pages Posted: 21 Feb 2020

See all articles by Minyou Fan

Minyou Fan

Queen's University Belfast, Queen's Management School

Fearghal Kearney

Queen's Management School

Youwei Li

Hull University Business School

Jiadong Liu

Queen's University Belfast - Queen's Management School

Date Written: February 20, 2020

Abstract

Recent literature shows that momentum strategies exhibit significant downside risks over certain periods, or called "momentum crashes." We find that the high uncertainty of momentum strategies is sourced from the cross-sectional volatility of individual stocks. Stocks with high realised volatility over the formation period tend to lose momentum effect, while stocks with low realised volatility show strong momentum. A new approach, generalised risk-adjusted momentum (GRJMOM), is introduced to mitigate the negative impact of high momentum risks. GRJMOM is proven to be more profitable and less risky than the existing momentum ranking approaches in 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 Joseph and Li, Youwei and Liu, Jiadong, Momentum and the Cross-Section of Stock Volatility (February 20, 2020). 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 Joseph Kearney

Queen's Management School ( email )

Riddel Hall
Belfast, Northern Ireland BT9 5EE
Northern Ireland

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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