Using Volatility to Enhance Momentum Strategies

Abstract

A simple modification to the popular momentum strategy applied to international market indices produces highly profitable results in emerging market indices. High-volatility recent winners outperform low-volatility recent losers on an annualised basis by 17.4 per cent, with the strategy's long portfolio driving the superior performance. In contrast, applying the momentum/volatility strategy to developed market indices produces small but consistent improvements over the standard momentum approach.