Realised volatility and industry momentum returns

Motivated by the importance of industry volatility and the profitability of industry momentum strategy, this study investigates the relationship between realised volatility and industry momentum returns. The analysis uses daily return data for 48 US industries from July 1969 to June 2021 to calculate realised volatility and to gauge the raw return effect on short- and medium-horizon double-sort momentum-trading strategies. The findings show that past volatility positively relates to industry momentum and that this relationship is stronger after controlling for common risk factors (market, size, value, investment, and profitability). Decomposing the realised total volatility into idiosyncratic and systematic components, this study reveals that both decomposed components are positively related to industry momentum returns. The findings are robust to alternative measures of volatility.

Xiaoyue Chen, Bin Li, Andrew C. Worthington