Price Momentum and Idiosyncratic Volatility
price momentum, idiosyncratic volatility, limit or arbitrage
We show that stocks with higher idiosyncratic volatility display greater price momentum; a relation which is economically large, statistically significant, and robust. Stocks with higher idiosyncratic volatility also experience quicker and larger reversals. These findings are consistent with the view that momentum profits are attributable to underreaction to firm-specific information. Our findings are also consistent with the hypothesis that idiosyncratic volatility is an important factor in limiting the successful arbitrage of the momentum effect. Further, we find a positive time-series relation between momentum returns and aggregate idiosyncratic volatility. Given the long-term rise in idiosyncratic volatility, this result helps explain why momentum profits not only persist but also increase after the sample period examined by Jegadeesh and Titman (1993).
Arena, Matteo P., K. Stephen Haggard, and Xuemin Yan. "Price momentum and idiosyncratic volatility." Financial Review 43, no. 2 (2008): 159-190.
DOI for the article
Finance and General Business