Higher moments and industry momentum returns

Realised volatility and industry momentum returns

“…Although the recent work by Badreddine and Clark (2021) uses industry-adjusted volatility to explain individual momentum returns in the UK, no study to our best knowledge has investigated this for industry momentum. As discussed, stock returns in the same industry display comovements (Parsons et al, 2020;Chen et al, 2021Chen et al, , 2022. Industry portfolios with higher gains also exhibit higher risk than other well-diversified trading portfolios (Badreddine and Clark, 2021).…”

“…Trading strategy. We follow previous studies (e.g., Amaya et al, 2015;Liu et al, 2016;Badreddine and Clark, 2021;Chen et al, 2022) and employ a double-sorting strategy to rank industries based on past volatility and then past returns. For each month t, we rank industries into three groups based on their past realised volatility over the E-month (E = 1, 3, 6, 9, 12, 24) estimation period.…”

“…Daily data on value-weighted industry returns of the 48 industry portfolios in the US stock market is sourced from the Kenneth French Data Library. This data has several advantages, including a long sample period to allow for better stability and unbiasedness of the estimates and widespread use to facilitate comparisons with existing work (Stivers and Sun, 2010;Chen et al, 2021Chen et al, , 2022. The sample period starts in July 1969 and ends in June 2021.…”

“…Motivated by the popularity of industry momentum strategy and the significant role of industry volatility, we construct sequential double sorts on 48 US industries following Amaya et al (2015), Liu et al (2016), Badreddine and Clark (2021), and Chen et al (2022). We find that industry momentum returns increase with the level of realised volatility over multiple trading horizons.…”

“…We also know that stocks within the same industry have similar asset profiles and capital structures, employ comparable production technologies, and operate in like economic, financial, and regulatory environments. These can also translate to similar return distributions and comovements (Parsons et al, 2020;Chen et al, 2021Chen et al, , 2022. Compared with volatility calculated using individual data, industry volatility would then capture risks common to all stocks in the same industry (Wu and Mazouz, 2016).…”