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Market volatility and momentum

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  • Wang, Kevin Q.
  • Xu, Jianguo

Abstract

We investigate the predictive power of market volatility for momentum. We find that (1) market volatility has significant power to forecast momentum payoffs, which is robust after controlling for market state and business cycle variables; (2) market volatility absorbs much of the predictive power of market state; (3) after controlling for market volatility and market state, other variables do not have incremental predictive power; (4) the time-series predictive power of market volatility is centered on loser stocks; and (5) default probability helps explain the predictive power of market volatility for momentum. These findings jointly present a significant challenge to existing theories on momentum.

Suggested Citation

  • Wang, Kevin Q. & Xu, Jianguo, 2015. "Market volatility and momentum," Journal of Empirical Finance, Elsevier, vol. 30(C), pages 79-91.
  • Handle: RePEc:eee:empfin:v:30:y:2015:i:c:p:79-91
    DOI: 10.1016/j.jempfin.2014.11.009
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Lin, Chaonan & Ko, Kuan-Cheng & Feng, Zhi-Xiang & Yang, Nien-Tzu, 2016. "Market dynamics and momentum in the Taiwan stock market," Pacific-Basin Finance Journal, Elsevier, vol. 38(C), pages 59-75.
    2. Fan, Minyou & Li, Youwei & Liu, Jiadong, 2017. "Risk adjusted momentum strategies: a comparison between constant and dynamic volatility scaling approaches," MPRA Paper 83510, University Library of Munich, Germany.
    3. Cheema, Muhammad A. & Nartea, Gilbert V & Man, Yimei, 2017. "Cross-Sectional and Time-Series Momentum Returns and Market States," MPRA Paper 78989, University Library of Munich, Germany.
    4. repec:eee:finana:v:51:y:2017:i:c:p:82-101 is not listed on IDEAS
    5. repec:pal:assmgt:v:18:y:2017:i:6:d:10.1057_s41260-017-0048-5 is not listed on IDEAS
    6. repec:eee:riibaf:v:42:y:2017:i:c:p:1445-1454 is not listed on IDEAS
    7. repec:eee:dyncon:v:91:y:2018:i:c:p:441-457 is not listed on IDEAS
    8. repec:eee:eneeco:v:68:y:2017:i:c:p:151-159 is not listed on IDEAS
    9. Francesco Chincoli & Massimo Guidolin, 2017. "Linear and nonlinear predictability in investment style factors: multivariate evidence," Journal of Asset Management, Palgrave Macmillan, vol. 18(6), pages 476-509, October.
    10. Min, Byoung-Kyu & Kim, Tong Suk, 2016. "Momentum and downside risk," Journal of Banking & Finance, Elsevier, vol. 72(S), pages 104-118.
    11. Yuan Wu, 2016. "The Asymmetric Momentum Effect in the Chinese Class A Share Market Amid Market Swings," Asia-Pacific Financial Markets, Springer;Japanese Association of Financial Economics and Engineering, vol. 23(1), pages 107-136, March.

    More about this item

    Keywords

    Market volatility; Momentum; Time-series predictability of momentum; Default risk;

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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