Momentum is Still There Conditional on Volatility-Amplified Pessimism

67 Pages Posted: 24 Jan 2024 Last revised: 29 Jan 2024

See all articles by Soroush Ghazi

Soroush Ghazi

University of Alabama - Department of Economics, Finance and Legal Studies

Mark Schneider

University of Alabama

Jack Strauss

University of Denver - Daniels College of Business

Date Written: December 30, 2023

Abstract

We introduce an index of volatility-amplified pessimism (VAP) constructed from a representative agent asset pricing model with probability weighting. The model predicts momentum returns decrease in market volatility and pessimism, and predicts the opposite for the equity premium. Our real-time trading strategy uses the index to switch across different VAP states, and generates a large spread between momentum and market returns. In contrast, other momentum strategies have recently disappeared net of transaction costs. We find that momentum is still there, conditional on the interaction between the representative agent's pessimism and market volatility.

Keywords: Momentum; Empirical Asset Pricing; Probability Weighting

JEL Classification: D8, D81, G40, G41

Suggested Citation

Ghazi, Soroush and Schneider, Mark and Strauss, Jack, Momentum is Still There Conditional on Volatility-Amplified Pessimism (December 30, 2023). Available at SSRN: https://ssrn.com/abstract=4680094 or http://dx.doi.org/10.2139/ssrn.4680094

Soroush Ghazi (Contact Author)

University of Alabama - Department of Economics, Finance and Legal Studies ( email )

P.O. Box 870244
Tuscaloosa, AL 35487
United States

HOME PAGE: http://sites.google.com/view/soroush-ghazi

Mark Schneider

University of Alabama ( email )

Tuscaloosa, AL
United States

Jack Strauss

University of Denver - Daniels College of Business ( email )

2101 S. University Blvd.
Denver, CO 80208
United States

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