Another look at value and momentum: volatility spillovers

Klaus Grobys () and Sami Vähämaa
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Klaus Grobys: University of Vaasa

Review of Quantitative Finance and Accounting, 2020, vol. 55, issue 4, No 10, 1459-1479

Abstract: Abstract This paper examines volatility interdependencies between value and momentum returns. Using U.S. data over the period 1926–2015, we document persistent periods of low and high volatility spillovers between value and momentum strategies. Moreover, we find that the intensity of the volatility spillovers may change substantially in very short periods of time and that these shifts in spillover intensity can be linked to prominent economic events and financial market turmoil. Our results further demonstrate that value returns increase and momentum returns decrease monotonically with increasing volatility spillovers between the two strategies. Given this linkage between spillover intensity and returns, we propose a simple trading strategy which utilizes a volatility spillover index for allocating funds between value and momentum portfolios. The proposed trading strategy outperforms value and momentum strategies and generates payoffs that are not subject to option-like behavior.

Keywords: Asset pricing; Value effect; Momentum effect; Volatility spillovers; Volatility spillover index (search for similar items in EconPapers)
JEL-codes: G11 G12 G14 (search for similar items in EconPapers)
Date: 2020
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Citations: View citations in EconPapers (4)

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Persistent link: https://EconPapers.repec.org/RePEc:kap:rqfnac:v:55:y:2020:i:4:d:10.1007_s11156-020-00880-2

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DOI: 10.1007/s11156-020-00880-2

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