Research

G. DeSimone: Amplified Momentum

June 18, 2019

This article takes a deeper look at the drivers of the momentum factor. A traditional momentum strategy involves buying winners and selling losers based on the past 12 months returns. This strategy can be amplified by selecting stocks within the Winner-minus-Loser portfolio that have high implied idiosyncratic volatility (IVOL), extracted from option prices. The short portfolio of high IVOL loser stocks generates significant underperformance, due these stocks being overpriced by investors for their lottery-like payoffs.