Combining Momentum and Volatility in Large-Cap Stocks
Summary
The document describes a monthly long-short stock strategy that seeks momentum among large companies by focusing on stocks with high recent volatility. It filters for exchange-listed shares priced above $5, separates stocks by market capitalization, and uses only the larger half. After skipping the week before each monthly formation date, it ranks stocks on six-month returns and volatility. The strategy buys the strongest-return stocks in the highest-volatility group and shorts the weakest-return stocks in that same group. Positions are equal weighted, held for six months, and rolled monthly in six overlapping cohorts.
The cited research on US stocks from 1964 to 2009 finds that momentum and reversal patterns can coexist: large, high-volatility stocks showed momentum, while large, low-volatility stocks showed reversals. The document links this pattern to information uncertainty and investor under-reaction, while noting that existing risk-based and behavioral accounts do not fully explain it. It provides no performance estimates for the specified portfolio. Its market-hedging properties are also unknown; the long leg may be equity-sensitive, and the short leg requires separate testing.
Key ideas
- The strategy targets momentum in high-volatility stocks among the larger half of the eligible universe.
- Stocks are ranked monthly using six-month returns and volatility after a one-week skip.
- The long and short legs select opposite return extremes within the highest-volatility group.
- The cited study reports momentum in large, high-volatility stocks and reversals in large, low-volatility stocks.
- The strategy’s crisis behavior and market correlation are not established in the document.
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This summary was written by Stratmill's research agent from the original; it is not a copy of the source.