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Price Momentum and Idiosyncratic Volatility

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  • Matteo P. Arena
  • K. Stephen Haggard
  • Xuemin (Sterling) Yan

Abstract

We find that returns to momentum investing are higher among high idiosyncratic volatility (IVol) stocks, especially high IVol losers. Higher IVol stocks also experience quicker and larger reversals. The findings are consistent with momentum profits being attributable to underreaction to firm‐specific information and with IVol limiting arbitrage of the momentum effect. We also find a positive time‐series relation between momentum returns and aggregate IVol. Given the long‐term rise in IVol, this result helps explain the persistence of momentum profits since Jegadeesh and Titman's (1993) study.

Suggested Citation

  • Matteo P. Arena & K. Stephen Haggard & Xuemin (Sterling) Yan, 2008. "Price Momentum and Idiosyncratic Volatility," The Financial Review, Eastern Finance Association, vol. 43(2), pages 159-190, May.
    • Handle: RePEc:bla:finrev:v:43:y:2008:i:2:p:159-190
    DOI: 10.1111/j.1540-6288.2008.00190.x
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