Less pain, more gain: Volatility-adjusted residual momentum in international equity markets

Zaremba, Adam; Umutlu, Mehmet; Maydybura, Alina

Abstract

We offer a new type of momentum strategy — the volatility-adjusted residual momentum (VARMOM) — which is based on average past residuals scaled with their volatility. We demonstrate its application for international asset allocation within 51 country indexes and 888 industry portfolios from developed and emerging markets. The VARMOM trading strategy notably outperforms and subsumes a standard momentum strategy, delivering Sharpe ratios that are two to three times higher. The VARMOM is particularly strong across portfolios characterised by high limits to arbitrage and following bull markets, supporting the behavioural explanation of momentum. The results are robust to alternative portfolio construction methods as well as the inclusion of trading costs and control variables. They are also valid for several subperiods and subsamples.

Citation

Zaremba, A., Umutlu, M., & Maydybura, A. (2018). Less pain, more gain: Volatility-adjusted residual momentum in international equity markets. Investment Analysts Journal, 47(2), 165-191. https://doi.org/10.1080/10293523.2018.1469290

• Journal Article Type: Article
• Acceptance Date: Apr 21, 2018
• Online Publication Date: May 28, 2018
• Publication Date: Apr 3, 2018
• Deposit Date: Jan 29, 2023
• Journal: Investment Analysts Journal
• Print ISSN: 1029-3523
• Electronic ISSN: 2077-0227
• Publisher: Routledge
• Peer Reviewed: Peer Reviewed
• Volume: 47
• Issue: 2
• Pages: 165-191
• DOI: https://doi.org/10.1080/10293523.2018.1469290
• Keywords: VARMOM, residual momentum, volatility-adjusted momentum, country momentum, industry momentum, asset pricing, international investment, return predictability, equity anomalies, cross section of returns
• Public URL: http://researchrepository.napier.ac.uk/Output/3011114