Factor Momentum, Investor Sentiment, and Option-Implied Volatility-Scaling

Abstract

Factor momentum produces robust average returns that exhibit a similar economic magnitude as documented for stock price momentum. To the extent that the PEAD factor captures mispricing, winner factors profit from being long on underpriced stocks and short on overpriced stocks. Oppositely, loser factors’ negative exposure to the PEAD factor suggests that loser factors capture mispricing by being long on overpriced stocks and short on underpriced stocks. Option-implied volatility scaling increases both the economic magnitude and statistical significance of factor momentum. Factor momentum is not exposed to the same crashes as stock price momentum and could therefore serve as a hedge for stock price momentum crash risks.

Keywords: sset pricing, factor momentum, investor sentiment, option-implied volatility scaling, VIX

JEL Classification: G12, G14