Does market volatility have predictive power for momentum returns?

: evidence for the United Kingdom and Japan

Abstract

Recent studies for the United States indicate that market volatility predicts momentum returns. The objective of this paper is to analyze if this happens in two different countries, the United Kingdom and Japan. Using a simple time series regression not only with variables regarding market volatility and market state but also macroeconomic variables, the return dispersion, sentiment index, default risk, and expected future volatility it turns out that indeed, in the case of the UK, market volatility has predictive power for the momentum payoff after controlling for all other variables except one, the VSTOXX. This measure of expected volatility can subsume the power of market volatility but only in the positive market state. Regarding Japan, the volatility of the market only has predictive power when it is used in combination with macroeconomic variables. This situation maintains with the rest of the variables except for the default risk proxies that in a down market take away the predictive power of market volatility. The conclusions that were obtained from the study of each country differ.

Date of Award	2 Feb 2022
Original language	English
Awarding Institution	Universidade Católica Portuguesa
Supervisor	Pedro Barroso (Supervisor)