Abstract
AbstractMomentum stocks are exposed to aggregate volatility risk. This paper estimates an exponential generalized autoregressive conditional heteroskedastic model of market volatility to introduce a new volatility risk factor. Winners have negative loadings on this factor, whereas losers have positive loadings. Because volatility risk carries a negative price of risk, the new factor explains 73% of momentum profits. The paper rationalizes the volatility risks of momentum portfolios using growth option arguments and explains why momentum profits are short‐lived, depend on market states, and concentrate among firms with high idiosyncratic volatility. Results are robust to controlling for other risk factors and using alternative estimation procedures.
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