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

Zaremba, Adam; Umutlu, Mehmet; Maydybura, Alina


Adam Zaremba

Alina Maydybura


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.

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
Keywords VARMOM, residual momentum, volatility-adjusted momentum, country momentum, industry momentum, asset pricing, international investment, return predictability, equity anomalies, cross section of returns