Price Momentum and Idiosyncratic Volatility

Authors


  • We thank Arnold Cowan, Paul Brockman, John Howe, Cyndi McDonald, Sandra Mortal, Richard Roll, Doug Witte, two anonymous referees, an anonymous Associate Editor and seminar participants at the University of Missouri – Columbia, the 2005 European meeting of the FMA, and the 2005 FMA annual meeting for valuable comments. We thank I/B/E/S for providing analyst coverage data.

* Corresponding author: Department of Finance, 427 Cornell Hall, University of Missouri, Columbia, MO 65211-2600; Phone: +(573) 884-9708; Fax: +(573) 884-6296; E-mail: YanX@Missouri.edu

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.

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