The asymmetric effects of industry specific volatility in momentum returns

In this paper we look specifically at the effect of industry volatility on momentum returns, a phenomenon that has been overlooked in previous studies. We find that industry volatility has asymmetric effects on the winner and loser portfolios. The cross-sectional variation in the returns of high and low volatility winners is driven primarily by industry volatility. It disappears after controlling for the effect of industry volatility on total firm volatility. However, for firms in the loser portfolios, the differential return between high and low volatile stocks remains even after adjusting for industry volatility. This implies that momentum returns are mainly induced by industry specific news at the winners’ level and firm-specific factors at the losers’ level. We also find that liquidity, which seems to have little or no influence on the momentum phenomenon before accounting for industry volatility, has an important effect after industry volatility is accounted for