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An idea of risk-neutral momentum and market fear

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  • Schadner, Wolfgang

Abstract

This study models a link between ex-ante autocorrelation in expected returns and risk-neutral momentum, enabling a straightforward interpretation of market sentiment. Correspondingly, concepts of fractal Brownian motion are applied to option implied volatility term structures. Based on an empirical investigation of daily SP500 and Euro Stoxx 50 data (2006–2018), we find that the expected return momentum varies over time, as fear spreads much faster than investor confidence can be regained. Thus, we conclude that risk-neutral momentum is a novel perspective for further research in the fields of risk management, asset allocation, and behavioral finance.

Suggested Citation

  • Schadner, Wolfgang, 2020. "An idea of risk-neutral momentum and market fear," Finance Research Letters, Elsevier, vol. 37(C).
    • Handle: RePEc:eee:finlet:v:37:y:2020:i:c:s1544612319302399
    DOI: 10.1016/j.frl.2019.101347
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    3. Schadner, Wolfgang, 2021. "On the persistence of market sentiment: A multifractal fluctuation analysis," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 581(C).

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    More about this item

    Keywords

    Momentum; Sentiment; Implied volatility; Long-term memory; Fractal Brownian motion; Market fear;
    All these keywords.

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • G01 - Financial Economics - - General - - - Financial Crises
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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