Volatility Persistence and Momentum
40 Pages Posted: 7 Oct 2020
Date Written: October 3, 2020
Volatility persistence is an important channel for understanding rational momentum effects. Since risk premia are, ceteris paribus, proportional to the volatility of the aggregate market or individual assets, momentum in the risk premia is expected to be strong when the volatility is highly persistent. I present empirical evidence that volatility persistence could capture the autoregressive risk premium. It also suggests that momentum profits can be attributed to time-varying risk. Furthermore, after controlling for risk-based momentum effect, the relationship between past and current returns turns out to be unclear, meaning that momentum exists mostly at the risk premium level.
Keywords: volatility persistence, momentum, time-varying risk premia, business cycles
JEL Classification: G12
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