Momentum and market volatility: a Bayesian regime-switching model

Jia Cao, Laurence Copeland

    Allbwn ymchwil: Cyfraniad at gyfnodolynErthygladolygiad gan gymheiriaid


    Our study finds that momentum is a persistent phenomenon that exhibits great variability in its strength in the UK stock market. Inspired by psychological evidence that cognitive biases can shift overtime, we conjecture that there may be two stock market states, namely, the calm and the turbulent market state, and that the switch between these two market states is governed by market volatility. Using Bayesian estimation methods, our results confirm the role of market volatility as the critical switching variable, which is also found to have additional predictive power for momentum returns in the turbulent market state. Somewhat contradictory to the findings in cross-sectional studies, we find that past returns have a negative impact on momentum profits. We also find that both winners and losers tend to perform better in the turbulent market state than in the calm market state and that losers’ outperformance is responsible for large momentum losses in the turbulent market state. Investment strategies that take advantage of the predictability of momentum dynamics outperform momentum strategies. Our findings are not readily reconciled with risk-based explanations but can be loosely explained in a behavioural framework.
    Iaith wreiddiolSaesneg
    Rhif yr erthygl2062250
    Nifer y tudalennau25
    CyfnodolynEuropean Journal of Finance
    Rhif cyhoeddi00
    Dyddiad ar-lein cynnar15 Ebrill 2022
    Dynodwyr Gwrthrych Digidol (DOIs)
    StatwsE-gyhoeddi cyn argraffu - 15 Ebrill 2022

    Ôl bys

    Gweld gwybodaeth am bynciau ymchwil 'Momentum and market volatility: a Bayesian regime-switching model'. Gyda’i gilydd, maen nhw’n ffurfio ôl bys unigryw.

    Dyfynnu hyn