Return dispersion and conditional momentum returns: International evidence

Abstract

The momentum premium is pervasive across international markets and different asset classes; however, the drivers of this premium are yet to be established. This paper contributes to the literature by examining the association between a leading economic indicator, namely return dispersion, and the momentum premium. This association is examined across four regional momentum strategies and a global momentum strategy. We document a strong association between return dispersion and the momentum premium using both ex-post and ex-ante empirical methods. This association is robust to the inclusion of a set of control variables and an alternate specification of return dispersion. We test a conditional momentum strategy that scales the unconditional momentum strategy by the level of return dispersion and find that the conditional momentum strategy outperforms the unconditional momentum strategy in all regions. The results presented in this paper document the dynamic association between risk and the momentum premium.