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Market volatility, momentum, and reversal: a switching strategy

Author

Listed:
  • Hilal Anwar Butt

    (Institute of Business Administration)

  • James W. Kolari

    (Texas A&M University)

  • Mohsin Sadaqat

    (Institute of Business Administration)

Abstract

Momentum profits collapse and reversal occurs when preceding market volatility is relatively high. Based on these intertemporal patterns, we implement an investment strategy that switches from momentum to reversal when volatility is high. The proposed switching strategy has two advantages over scaled momentum strategies: (1) the leverage factor is constant, and (2) no ex post information is used to control volatility. Additionally, in US stock market tests, the switching strategy eliminates losses due to momentum crashes, a problem that has plagued momentum strategies in practice. Further evidence confirms that the switching strategy is successful in other developed and emerging stock markets.

Suggested Citation

  • Hilal Anwar Butt & James W. Kolari & Mohsin Sadaqat, 2024. "Market volatility, momentum, and reversal: a switching strategy," Journal of Asset Management, Palgrave Macmillan, vol. 25(5), pages 460-478, September.
    • Handle: RePEc:pal:assmgt:v:25:y:2024:i:5:d:10.1057_s41260-024-00372-1
    DOI: 10.1057/s41260-024-00372-1
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    References listed on IDEAS

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    More about this item

    Keywords

    Market volatility; Momentum; Momentum crashes; Reversal;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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