This is the first study that investigates the profitability of Barroso and Santa-Clara’s (2015) risk managing approach for George and Hwang’s (2004) 52-week high momentum strategy in an industrial portfolio setting. The findings indicate that risk-managing adds value as the Sharpe ratio increases, and the downside risk remarkably decreases.

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Grobys 2017 Risk-managed 52-Week High Industry Momentum, Momentum Crashes, And Hedging Macroeconomic Risk

This is the first study that investigates the profitability of Barroso and Santa-Clara’s (2015) risk managing approach for George and Hwang’s (2004) 52-week high momentum strategy in an industrial portfolio setting. The findings indicate that risk-managing adds value as the Sharpe ratio increases, and the downside risk remarkably decreases.

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Klaus Grobys

Abstract

This is the first study that investigates the profitability of Barroso and Santa-Claras (2015) riskmanaging approach for George and Hwangs (2004) 52-week high momentum strategy in an

industrial portfolio setting. The findings indicate that risk-managing adds value as the Sharpe

ratio increases, and the downside risk remarkably decreases. Even after controlling for the spread

of the traditional 52-week high industry momentum strategy in association with standard riskfactors, the risk-managed version generates economically and statistically significant payoffs.

Notably, the risk-managed strategy is partially explained by changes in cross-sectional return

dispersion, whereas the traditional strategy does not appear to be exposed to such economic

risks.

Keywords: asset pricing, momentum crash, industry momentum, optionality effect, 52-week

high momentum

JEL classification: G12, G14

K. Grobys

Department of Accounting and Finance, University of Vaasa, Wolffintie 34, 65200 Vaasa, Finland

e-mail: klaus.grobys@uwasa.fi; grobys.finance@gmail.com

1. Introduction

The persistence and pervasiveness of the momentum anomaly, documented first by Jegadeesh

and Titman (1993), has been discussed in the literature for more than two decades. Moskowitz

and Grinblatt (1999) extended Jegadeesh and Titmans (1993) study by proposing industrial

momentum strategies, and argued that stock price momentum is primarily driven by industry

factors. George and Hwang (2004) proposed further extensions to the traditional momentum

strategy, referred to as 52-week high momentum strategies. The 52-week high momentum

strategy invests in stocks that are near to their 52-week high prices and sells stocks that exhibit

the largest distances to their 52-week high prices. George and Hwang (2004) compare their

strategy to both strategies Jegadeesh and Titmans (1993) traditional stock momentum, and

Moskowitz and Grinblatts (1999) industrial momentum. They argue that the 52-week high

momentum returns will yield higher returns than those achieved through the normal momentum

strategy.

In a recent paper, Daniel and Moskowitz (2016) show that momentum returns are subject

to remarkable crashes occurring during strong market reversals during bear market states.

Barroso and Santa-Clara (2015) emphasize that in 2009, the traditional momentum strategy in

line with Jegadeesh and Titman (1993) experienced a crash of -73.42% in three months. They

argue furthermore that it takes decades to recover from these sudden crashes, and momentum

returns do not compensate an investor with reasonable risk aversion for these strings of

enormous negative payoffs. In their paper, the authors propose a strategy to manage the

downside risk of momentum strategies by estimating the risk of momentum by using the realized

variance of daily returns. They find that the variance of the zero-cost portfolio is highly

predictable. The Sharpe ratio of their proposed risk-managed momentum portfolio is 83% higher

and, as a consequence, risk-managed momentum may even be a much greater puzzle than the

traditional strategy. While Plessis and Hallerbach (2015) explore two types of volatility

weightings applied to cross-sectional and time-series momentum strategies, employing 49 US

industry portfolios, there is no study available that investigates the effects of Barroso and SantaClaras (2015) recently proposed risk-managing approach in an industrial portfolio setting,

employing George and Hwangs (2004) 52-week high momentum strategy.

This is the first paper that extends Barroso and Santa-Claras (2015) risk-managed

momentum to industrial portfolios employing George and Hwangs (2004) 52-week high

2

momentum strategy. This study employs 48 value-weighted Fama and French industry portfolios

and sorts all available industries by the nearness to their 52-week high/low price into four

portfolio groups (PG). The first PG 1 contains those industries that are nearest to their 52-week

high process on the last trading day before portfolio formation, whereas PG 4 contains those that

exhibit the largest distance to the 52-week high prices. The zero-cost strategy is long on PG 1

and short on PG 4. The variances of the zero-cost portfolio are forecasted in the same manner as

detailed in Barroso and Santa-Clara (2015), and employed to estimate the scaling factor to either

leverage or deleverage the invested amount in the strategy. Using a sample period from July 1928

until August 2015, the portfolios are risk-adjusted using the standard Fama and French (1993)

three-factor model. Moreover, Daniel and Moskowitzs (2016) optionality regressions are

employed to explore potential momentum crash risks. Finally, motivated by recent literature that

establishes links between momentum and cross-sectional return dispersion (Connolly and

Stivers, 2003, Stivers and Sun, 2010, Grobys, Kolari and Heinonen, 2017), the effects of changes

in cross-sectional industry return dispersion on the 52-week high industry momentum and the

risk-managed counterpart are explored in detail. Various robustness checks complete the study.

This paper contributes to the literature in many important ways. First, this is the first

paper that extends Barroso and Santa-Claras (2015) risk-managing approach to George and

Hwangs (2004) 52-week high momentum in an industry setting. Barroso and Santa-Clara (2015,

p.112) emphasize that managing the risk of momentum not only avoids its worse crashes but

also improves the Sharpe ratio in the months without crashes. Second, this is also the first paper

that investigates the presence of crash risks in terms of potential optionality effects in the spirit of

Daniel and Moskowitz (2016) in a 52-week high industry momentum, as proposed by George

and Hwang (2004). Daniel and Moskowitz (2016) show that even though momentum appears to

be persistent and Asness, Moskowitz, and Pedersen (2013) document the ubiquity of momentum

payoffs across asset classes, momentum payoffs seem to be subject to remarkable crashes. There

is no study available that investigates those crashes in the context of George and Hwangs (2004)

52-week high industry momentum setting. In doing so, I also explore the effects of Barroso and

Santa-Claras (2015) risk-managing approach on potential momentum crash risks. Finally, recent

literature documents a link between momentum return and cross-sectional returns dispersion

(Connolly and Stivers, 2003, Stivers and Sun, 2010, Grobys, Kolari and Heinonen, 2017).

Chichernea et al. (2015, p.147) argue that RD is likely to capture the uncertainty associated

3

restructuring. This is the first study that investigates whether or not the payoffs of George and

Hwangs (2004) 52-week high industry momentum strategy or the risk-managed version,

employing

The findings of this study indicate that the risk-managed 52-week high industry

momentum strategy generates higher expected returns and lower volatility than the original

version confirming Santa-Claras (2015) finding in the U.S. stock market setting. This result also

confirms Plessis and Hallerbach (2015), who document that weighting Moskowitz and

Grinblatts (1999) industrial momentum strategy with its own volatility increases the Sharpe

ratio and decreases the downside risk. Notably, even though the risk-managed 52-week high

industry momentum strategy is highly correlated with the traditional version, it generates 25

basis points risk-adjusted excess payoffs per month (i.e., after controlling for the traditional 52week high industry momentum strategy) with a Newey-West (1987) t-statistic of 3.71 which

suggests a robust result (see Harvey, Liu, and Zhu 2016). Surprisingly, neither the 52-week high

industry momentum strategy nor the risk-managed counterpart, are subject to Daniel and

Moskowitzs (2016) optionality effects. Finally, while the returns of the traditional 52-week high

industry momentum strategy are not systematically varying with changes in cross-sectional

industry return dispersion, the risk-adjusted counterpart appears to be a hedge for

macroeconomics risk. This result is in line with Grobys, Kolari and Heinonen (2017), who

establish a robust link between changes in the state of cross-sectional currency return dispersion

and currency momentum in finding that momentum payoffs are significantly higher in bad

economics states. This study finds that the payoff difference between high cross-sectional

industry return dispersion and low cross-sectional industry return dispersion is positive and

statistically significant on a common 5% significance level.

This paper is organized as follows. The next section describes the data. The third section

provides the empirical framework. The last section concludes.

2. Data

I downloaded daily and monthly data for 48 value-weighted industry portfolios, and monthly

data for 25 value-weighted portfolios sorted by size and book-to-market ratio from Kenneth

French website. The sample period is from July, 1 1926 until September 30, 2015. Moreover, I

used the matrix of daily industry returns to calculate the daily price series for all industries.

3. Methodology

3.1. Portfolio analysis

In the following, I describe how the 52-week high momentum strategy was implemented. In the

first iteration, starting at August 1927, I sorted all industry portfolios for which data was

available in to quartiles. The first quartile comprises one fourth of all available industries that

exhibited the lowest relative distance to their 52-week high and the last trading day in July 1927,

that is, the last trading day of the preceding month before portfolio formation. The fourth quartile

comprises one fourth of all available industrial portfolios that exhibited the highest relative

distance to their 52-week high and the last trading day in July. The zero-cost portfolio is long on

PG 1 and short on PG 4. This procedure was updated at the beginning of each month.

In Table 1 the descriptive statistics are reported. From Table 1 we observe that the sample

average return (raw return) linearly decreases as we move from portfolio group 1 (PG 1) to

portfolio group 4 (PG 4). The zero-cost strategy generates a payoff of 0.61% per month. The

Newey-West t-statistic of 3.96 suggests a robust result (see Harvey, Liu, and Zhu 2016). The

zero-cost portfolio exhibits a maximum (minimum) return of 26.03% (-48.59%) over the sample

period. Moreover, the skewness is negative and implies a crash risk.

Next, I followed Barroso and Santa-Clara (2015) and used an estimate of the 52-week

high industry momentum risk to scale the exposure to the strategy to have a constant risk over

time. For each month t, I compounded the variance forecasts

previous period j. Let

momentum strategy and

,{ }

of the last trading sessions of each month. Then the variance forecasts were estimated as

5

= 21

/251.

(1)

In my notation, WML is the zero-cost 52-week high industry momentum portfolio. Then I used

the forecasted variances to scale the returns as

where

(2)

momentum, and

documented in Barroso and Santa-Clara (2015), scaling corresponds to having a weight in the

long and short legs that is different from one and which varies over time. Furthermore, I

followed Barroso and Santa-Clara (2015) and chose

of the weights over time (see Figure 1). The weights for the scaled 52-week high industry

momentum range between 0.01 and 2.54 which is in line with the figures documented in Barroso

and Santa-Clara (2015), who report weights varying between 0.13 and 2.00 for the scaling factor.

The results reported in Table 1 are very similar to those documented in Table 3 in Barroso and

Santa-Claras (2015) research: As we move from the traditional to the risk-managed strategy, we

observe that the kurtosis drops from 18.24 (23.52) to 2.68 (5.65) for the momentum strategy (52high momentum strategy) is implemented in stocks (industrial portfolios). Similarly, we observe

that the skewness improves from -2.47 (-2.05) to -0.42 (-0.57) when comparing the results from

Table 3 in Barroso and Santa-Claras (2015) study with Table 1 in this study.

3.3. Risk-adjusting the plain and risk-managed 52-week high industry momentum strategies

Next, to risk-adjust the payoff I first regressed the plain 52-week high zero-cost industry

momentum portfolio successively on the standard risk-factors of the Fama and French (1993)

three-factor model. The results are reported in Table 2. From Table 2 we observe that the

intercept exhibit an economic magnitude of 0.92% per month and is statistically significant on

any level. The strategy is negatively exposed to the stock index. Interestingly, the strategy is not

significantly exposed to any other risk factor. Notably, the last row in Table 2 shows that the

6

loading against the industry momentum factor is virtually zero. This result implies that those two

investment strategies are in essence statistically orthogonal. This result confirms George and

Hwang (2004, p.2154), who find that Moskowitz and Grinblatts (1999) industrial momentum

and the 52-week high industry momentum strategy are two different strategies, and combining

them would improve profits from momentum investing.

Furthermore, the Fama and French (1993) three-factor is capable of explaining roughly

one third of the strategys return variation. Second, I employed the risk-managed version of the

52-week high zero-cost industry momentum portfolio and risk-adjusted the strategy by

regressing the payoffs on the Fama and French (1993) three-factor model. The results are

reported in Table 3. While the risk-adjusted payoffs are very similar to those of the plain

strategy, we observe that the risk-managed version is slightly exposed to big stocks, implied by

the significantly negative loading against the size factor in all model specifications. Like the

plain strategy, the risk-managed strategy is statistically uncorrelated with the standard industry

momentum strategy because the loading against the momentum factor is statistically not different

from zero, irrespective of which model is taken into account. Unsurprisingly, once the spread of

the plain 52-week high industry momentum portfolio is included in the regression model, we

observe that the loading is significantly positive. The economic magnitude was estimated at

0.66% and economically large. Interestingly, even after controlling for the spread of the plain

strategy, risk-managed counterpart exhibits a risk-adjusted average return of 25 basis points per

month that remain unexplained by other risk-factors. Also, Tables 2 and 3 show that the loadings

of the traditional 52-week high industry momentum strategy against the size and value factor are

statistically not different from zero on a common 5% significance level. This result confirms

Plessis and Hallerbach (2015), who find that the standard 12-1 industry momentum strategy is

virtually uncorrelated with other standard risk-factors.

In a recent paper, Daniel and Moskowitz (2016, p. 242) document that in panic states,

following multi-year market drawdowns and in periods of high market volatility, the prices of

past losers embody a high premium. When poor market conditions ameliorate and the market

starts to rebound, the losers experience strong gains, resulting in a momentum crash as

momentum strategies short these assets. They argue that in bear market states, when market

7

volatility is high, the down-market betas of the past losers are low, but the up-market betas are

very large which results in these momentum crashes. The negative skewness of the 52-week high

industry momentum strategy, as reported in Table 1, could be an indication that this strategy may

be subject to optionality effects.

To investigate potential optionality effects of the plain or risk-managed 52-week high

zero-cost industry momentum, I used the same optionality regression as in Daniel and

Moskowitzs (2016), that is, I estimated the following regression equation:

=

(3)

denotes the zero-cost portfolio of either the 52-week high industry momentum

where

return of the unconditional model and

beta).

returns),

denotes the value-weighted market factor in excess returns (e.g., excess CRSP

,

is an ex-ante bear market indicator that has a value of 1 if the cumulative market

return in the 24 months leading up to the start of month t is negative, and a value of zero

otherwise. The binary variable

1 if the excess market return is greater than zero, and a value of zero otherwise.

From Table 4 we observe that both strategies do not exhibit the optionality effect, as

documented in Daniel and Moskowitz (2016). The point estimates are virtually zero and

statistically insignificant. We also observe that only the loading against the market factor is

statistically significantly negative. On the one hand, it may be surprising that both strategies the

plain 52-week high zero-cost industry momentum portfolio and risk-managed counterpart do not

respond to rebounds in bear market states, like the plain momentum strategy implemented among

U.S. stocks. On the other hand, the regression results reported in Table 2 and 3 suggest that both

strategies are statistically uncorrelated with the plain industry momentum strategy.

3.5. 52-week high industry momentum strategy and cross-sectional return dispersion

Chichernea, Holder, and Petkevich, (2015a, 2015b) have established a robust link

between cross-sectional return dispersion and the accrual anomaly in both stock and bond

markets. In the spirit of Gomes et al. (2003) and Zhang (2005), they employ cross-sectional

return dispersion as a macro state variable that encapsulates general investing conditions faced

by firms. Another study that is of relevance for this paper is that of Connolly and Stivers (2003),

who document that cross-sectional stock return dispersion is associated with momentum payoffs

in equity markets. Further, Stivers and Sun (2010) employ cross-sectional return dispersion in

stock returns as macroeconomic state variable and find that cross-sectional return dispersion in

stock returns is negatively related to subsequent momentum premiums. However, no study has

investigated yet the potential relation of the 52-week high industry momentum strategy and

cross-sectional industry return dispersion.

To explore a potential link between cross-sectional industry return dispersion and the 52week high industry momentum strategy, respectively, the risk-managed counterpart, I first

followed Maio (2016) and estimated the corresponding measure of the cross-sectional return

dispersion process in an industrial portfolio setting as follows:

=

where

time t, and

(4)

= 48. The times series of the three month moving average of

is reported in

Figure A.1 in the appendix. Next, I regressed the returns of the 52-week high industry

momentum strategy successively on

averages

and

and

measurements. From Table 5 it becomes evident that once cross-sectional industry dispersion is

included in the regression model, the intercept of the respective regression models are

statistically not different from zero, irrespective of what measure is accounted for. This result is

surprising because the correlation between the plain 52-week high industry momentum strategy

and cross-sectional industry dispersion does not appear to be statistically significant either.

9

Next, I investigated the impact of cross-sectional industry dispersion on the riskmanaged 52-week high industry momentum strategy. The results are reported in Table 6. Unlike

the plain strategy, the first four rows of Table 6 suggest that the risk-managed version exhibits

statistically significant loadings against the lagged measures

and

. At the first

glance this result suggests that in increase in cross-sectional industry dispersion is associated

with a decrease in payoffs of the risk-managed strategy. However, once the vector of excess

returns of the CRSP index is included in the regression models, the sensitivity against the

respective measure of cross-sectional industry dispersion becomes statistically insignificant. A

possible explanation for this phenomenon is a multicollinearity problem. The correlation

between the excess returns of the CRSP index and

, respectively,

with Newey-West (1987) t-statistics of 2.56 and 3.05 indicating statistical significance on a 5%

and 1% level.

In order to investigate the effect of changes in cross-sectional industry dispersion on 52week high industry momentum in more detail, I followed the empirical setup in Stambaugh et al.

(2012) to design the empirical tests. To investigate profits from various anomalies in the U.S.

stock market, the authors divided time series observations for investor sentiment into above and

below median values corresponding to high and low investor sentiment. In the same manner, I

divided intertemporal observations for cross-sectional industry return dispersion into above and

below median values indicating states of high and low cross-sectional industry return dispersion

to examine 52-week high industry momentum profits.

As in Stivers and Sun (2010) and Chichernea et al. (2015a), I utilized for the sorting

procedure the three-month moving averages of cross-sectional industry return dispersion. High

(low) dispersion months have three-month cross-sectional industry return dispersion values

above (below) their respective sample medians. Average returns are compounded separately for

the high and low dispersion months. The results are reported in Table 7. Chichernea et al.

(2015a) have argued that states of high cross-sectional stock return dispersion correspond to

times of economic stress. Notably, the significant positive difference in average returns between

bad and good states of the economy, as reported in Table 7, suggests an insurance-like

explanation for the profitability of the risk-managed 52-week high industry momentum strategy

because the payoffs are considerably higher in bad states of the economy, that is, in states where

the cross-sectional dispersion is high. Interestingly, this finding is line with Grobys, Kolari and

10

Heinonen (2017), who find that the currency momentum strategy varies systematically with

states of cross-sectional currency return dispersion. Their findings indicate that the payoff

differential of the currency momentum strategy between states of high and low cross-sectional

currency return dispersion is positive and both statistically and economically significant,

implying that currency momentum may act as hedge for global economic risk. On the other

hand, the plain strategy does not significantly vary with economic states because the return

difference between good and bad state is small and statistically not significant, irrespective of

whether or not the market factor is controlled for. Both findings are interesting issues for future

research because they are contrary to Connolly and Stivers (2003) and Stivers and Suns (2010)

findings that equity market momentum appears to be procyclical.

To investigate whether or not the results are sample specific, I divided the sample into two

subsamples of equal length and repeat the analysis presented in Table 2 and 3 for the second

subsample running from March 1973 to August 2015. The results, reported in Table A.2 and A.3

in the appendix, show that the point estimate for the average net risk-managed excess return after

controlling for standard risk factors and the plain 52-week high zero-cost industry momentum

spread is 0.25% per month, like the estimate for the whole sample reported in Table 3.

Next, I employed a different measure of cross-sectional return dispersion to check how

sensitive the findings are when employing a different measure of cross-sectional equity return

dispersion in the spirit of Maio (2016). In doing so, I downloaded 25 value-weighted Fama and

French portfolios sorted by size and book-to-market ratio from Kenneth French website. In

Figure A.1 in the appendix, both time series are plotted, the three-month moving average of

cross-sectional industry return dispersion, and the corresponding measure using portfolios sorted

by size and book-to-market ratio. Visual inspection of Figure A.1 shows that both time series

exhibit very similar evolutions. Indeed, the sample correlation is estimated at 0.63, and with a

Newey-West (1987) t-statistic of 10.97 statistically significant on any level. A principal

component analysis shows furthermore that the first eigenvalue explains 82% of the overall

variation implying that, indeed, both measures are proxies for the same underlying risk. Then

again, I divided intertemporal observations for currency RD into above and below median values

indicating high and low cross-sectional industry return dispersion to examine 52-week high

11

industry momentum profits. The results are reported in Table A.4. in the appendix. We observe

that the return difference between turbulent and calm states of the economy for the risk-adjusted

risk-managed 52-week high industry momentum strategy is 0.40% per month and statistical

significant on a standard 5% significance level. As a consequence, this robustness check

confirms the studys previous finding.

4. Conclusion

This study investigates the profitability of the risk-managed 52-week high momentum strategy in

an industrial portfolio setting. The empirical results confirm that volatility-weighting adds value:

The average return increases, the volatility decreases, and the kurtosis and downside risk

considerably decreases. The risk-managed strategy generates 25 basis points per month excess

payoffs unexplained by standard risk-factors, even after controlling for the spread of the

traditional 52-week high industry momentum strategy. The average payoff of the risk-managed

version seems to be partially explained by changes in cross-sectional industry return dispersion,

while the average payoff of the traditional 52-week high industry momentum strategy are

statistically unrelated to changes in economic conditions as proxied by cross-sectional industry

return dispersion. Future research may explore the effects of other weighting schemes on 52week high momentum strategy implemented in both, stocks and industrial portfolios.

12

References

Asness, Clifford, Moskowitz, Tobias & Pedersen, Lasse, 2013. Value and Momentum

Everywhere. The Journal of Finance 68, 929-985.

Barroso, Pedro & Santa-Clara, Pedro, 2015. Momentum Has Its Moments. Journal of Financial

Economics 116, 111-120.

Chichernea, D. C., A. D. Holder, and A. Petkevich, 2015a. Does return dispersion explain the

accrual and investment anomalies? Journal of Accounting and Economics 60, 133148.

Chichernea, D. C., A. D. Holder, and A. Petkevich, 2015b. Why do bondholders care about

accruals? The role of time-varying macroeconomic conditions. Proceedings of the 64th Midwest

Finance Association Meeting.

Connolly, R., and C. Stivers, 2003. Momentum and reversals in equity index returns during

periods of abnormal turnover and return dispersion. Journal of Finance 58, 15211556.

Daniel, K., Moskowitz, T., 2016. Momentum Crashes. Journal of Financial Economics 122, 221247.

George, T., Hwang, C.Y., 2004. The 52-week high and momentum investing. Journal of Finance

59, 21452176.

Grobys, K., Kolari, J., Heinonen, J.-P., 2017. Is currency momentum a hedge for global

economic risk? Working paper.

Harvey, C. R., Y. Liu, and H. Zhu, 2016. ... and the cross-section of expected returns. Review of

Financial Studies 29, 568.

Jegadeesh, N., Titman, S., 1993. Returns to buying winners and selling losers: Implications for

stock market efficiency. Journal of Finance 48, 3591.

13

Maio, P., 2016. Cross-sectional return dispersion and the equity premium. Journal of Financial

Markets 29, 87109.

54, 1249-1290.

Newey, W. K. and K.D. West, 1987. A Simple, Positive Semi-definite, Heteroskedsticity and

Autocorrelation Consistent Covariance Matrix. Econometrica 55, 703-708.

Stambaugh, R. F., J. Yu, and Y. Yuan, 2012. The short of it: Sentiment and anomalies. Journal

of Financial Economics 104, 288302.

Stivers, C., and L. Sun, 2010. Cross-sectional return dispersion and time variation in value and

momentum premiums. Journal of Financial and Quantitative Analysis 45, 9871014.

14

Tables

Table 1. Descriptive statistics

Risk-managed

Raw

1.29

1.04

0.94

0.68

return

0.61***

0.66***

(3.96)

(5.86)

Median

1.59

1.33

1.29

0.65

0.73

0.80

Maximum

64.35

40.72

46.98

77.55

26.03

12.46

Minimum

-28.17

-29.68

-31.53

-32.96

-48.59

-21.87

Std.Dev.

5.35

5.57

6.14

7.56

4.41

3.40

Skewness

1.18

-0.07

0.39

1.32

-2.05

-0.57

Kurtosis

24.70

9.86

11.13

17.99

23.52

5.65

19089.56

366.77

(0.00)

(0.00)

JB-statistic

(p-value)

(0.00)

(0.00)

(0.00)

(0.00)

15

This Table reports the risk-adjusted payoffs of the plain 52-weeks high zero-cost industry

portfolios. The sample is from July 1928 until August 2015.

Intercept

CRSP

SMB

HML

MOM

R-squared

excess

0.85***

-0.39***

0.24

(6.75)

(-6.18)

0.92***

-0.34***

-0.14

-0.18*

(7.78)

(-8.22)

(-0.87)

(1.67)

0.92***

-0.34***

-0.14

-0.18*

-0.01

(7.62)

(-8.21)

(-0.87)

(-1.67)

(-0.31)

*Statistically significant on a 10% level.

16

0.27

0.27

portfolio

This Table reports the risk-adjusted payoffs of the risk-managed 52-weeks high zero-cost

industry portfolios. The sample is from July 1928 until August 2015.

Intercept

CRSP

SMB

HML

MOM

excess

52-week

R-squared

high

0.81***

-0.24***

0.14

(7.74

(-7.36)

0.85***

-0.19***

-0.20**

-0.08

(8.57)

(-7.72)

(-2.30)

(-1.49)

0.86***

-0.19***

-0.20**

-0.08

-0.01

(8.53)

(-7.72)

(-2.29)

(-1.49)

(-0.46)

0.25***

0.04***

-0.11***

0.04

-0.00

0.66***

(3.71)

(2.64)

(-2.58)

(1.13)

(-0.21)

(12.72)

0.18

** Statistically significant on a 1% level.

* Statistically significant on a 10% level.

17

0.18

0.73

Coeff.

Variable

Plain strategy

Risk-managed

strategy

R

I

Log likelihood

0.98***

0.97***

(7.55)

(8.25)

-0.14

-0.67*

(-0.20)

(-1.66)

-0.26***

-0.21***

(6.53)

(-5.87)

-0.12

-0.00

(-1.14)

(-0.02)

-0.12

-0.12

(-1.14)

(-0.82)

0.29

0.16

-2828.76

-2643.98

18

Table 5. The 52-week high zero-cost industry momentum and cross-sectional return

dispersion

This Table reports the risk-adjusted payoffs of the plain 52-weeks high industry momentum

strategy controlled for cross-sectional return dispersion. The sample is from July 1928 until

August 2015.

19

CRSP

Intercept

R-squared

excess

1.32

-1.03

(1.21)

(-0.60)

0.01

0.69

-0.11

(1.03)

(-0.10)

0.00

0.86

-0.36

0.00

(0.87)

(-0.23)

0.56

0.08

(0.84)

(0.07)

0.00

0.87

-0.03

-0.40***

(0.92)

(-0.02)

(-8.69)

0.59

0.38

-0.40***

(0.87)

(0.36)

(-6.90)

0.65

0.29

-0.40***

(0.71)

(0.20)

(-7.14)

0.64

0.30

-0.40***

(0.92)

(0.27)

(-6.39)

20

0.24

0.24

0.24

0.24

Table 6. The risk-managed 52-week high zero-cost industry momentum and cross-sectional

return dispersion

This Table reports the risk-adjusted payoffs of the risk-managed 52-weeks high industry

momentum strategy controlled for cross-sectional return dispersion. The sample is from July

1928 until August 2015.

21

Intercept

CRSP

R-squared

excess

1.39***

-1.05

(3.23)

(-1.59)

0.02

1.17***

-0.72**

(4.64)

(-1.98)

0.01

1.34***

-0.97*

0.01

(3.52)

(-1.69)

1.18***

-0.74**

(4.66)

(2.03)

0.01

1.13***

-0.47

-0.23***

(3.09)

(-0.86)

(-8.66)

1.10***

-0.43

-0.23***

(4.09)

(-1.12)

(-7.58)

1.22***

-0.60

-0.23***

(3.43)

(-1.14)

(-7.83)

1.22***

-0.60

-0.23***

(4.49)

(-1.56)

(-7.37)

** Statistically significant on a 1% level.

* Statistically significant on a 10% level.

22

0.15

0.15

0.15

0.15

Table 7. 52-week high zero-cost industry momentum and states of low versus high crosssectional return dispersion

This table reports average excess returns for the 52-week high zero-cost industry momentum strategy in

months classified as representing a high or low industry return dispersion state. A period is classified as a

low (high) state if the estimated three-month moving average at time 1 of the measure for currency

RD is below (above) its median value. The regression equations in Panel B control for the excess returns

of the CRSP index. The t-statistics are based on heteroscedasticity and autocorrelation consistent standard

errors in Newey and West (1987). The columns headed High-Low test the hypothesis that the difference

of the estimated parameters in the high state minus low state equals zero. The sample is from July 1928

until August 2015.

High state

Low state

High-Low

0.74***

0.48*

0.26

(6.97)

(1.67)

(0.83)

Risk-managed

0.97***

0.37**

0.60***

strategy

(7.28)

(2.04)

(2.71)

Plain strategy

High state

Low state

High-Low

0.98***

0.71***

0.27

(8.89)

(2.84)

(0.96)

Risk-managed

1.11***

0.50***

0.61***

strategy

(8.70)

(3.08)

(2.99)

Plain strategy

** Statistically significant on a 1% level.

* Statistically significant on a 10% level.

23

Figures

Figure 1. Scaling of the risk-managed 52-week high industry zero-cost portfolio

This figure plots the investment weights for the 52-week high zero-cost industry portfolio over time. To

scale the payoffs, we use a time window of months to estimate the variance forecast. The sample period is

from August 1927 to August 2015.

3

2,5

1,5

0,5

0

192708

193708

194708

195708

196708

24

197708

198708

199708

200708

This figure plots the three-month moving average of the cross-sectional return dispersion of the 48 Fama

and French value-weighted industry portfolios. The sample period is from August 1927 to August 2015.

4

3,5

3

2,5

2

1,5

1

0,5

0

192609

193903

195109

196403

197609

25

198903

200109

201403

Appendix

Table A.1. Descriptive statistics for cross-sectional industry return dispersion measures

Mean

Median

Maximum

Minimum

Std.Dev.

Skewness

Kurtosis

0.69

0.69

0.57

0.57

6.53

3.80

0.24

0.28

0.45

0.39

5.08

3.64

48.24

21.48

93711.69

(0.00)

17192.19

(0.00)

JB-test

(p-value)

26

Table A.2. Risk-adjusting the 52-week high zero-cost industry momentum portfolio

This Table reports the risk-adjusted payoffs of the plain 52-weeks high zero-cost industry

portfolios. The sample is from March 1973 until August 2015.

Intercept

CRSP

SMB

HML

MOM

R-squared

excess

0.72***

-0.35***

0.17

(4.59)

(-5.13)

0.81***

-0.34***

-0.22*

-0.17

(5.30)

(-5.15)

(-1.88)

(-1.38)

0.81***

-0.34***

-0.22

-0.17

-0.02

(5.11)

(-5.14)

(-1.89)

(-1.38)

(-0.49)

*Statistically significant on a 10% level.

27

0.20

0.21

Table A.3. Risk-adjusting the risk-managed 52-week high zero-cost industry momentum

portfolio

This Table reports the risk-adjusted payoffs of the risk-managed 52-weeks high zero-cost

industry portfolios. The sample is from March 1973 until August 2015.

Intercept

CRSP

SMB

HML

MOM

excess

52-week

R-squared

high

0.82***

-0.23***

0.09

(5.30)

(-4.69)

0.89***

-0.20***

-0.24**

-0.10

(5.81)

(-4.28)

(-2.35)

(-1.28)

0.89***

-0.20***

-0.24**

-0.10

-0.01

(5.79)

(-4.26)

(-2.34)

(-1.27)

(-0.17)

0.25***

0.06***

-0.06**

0.04

-0.02

0.79***

(2.88)

(2.76)

(-2.13)

(0.63)

(-1.28)

(10.30)

0.14

** Statistically significant on a 1% level.

* Statistically significant on a 10% level.

28

0.14

0.78

Table A.4. 52-week high zero-cost industry momentum and states of low versus high crosssectional return dispersion employing portfolios sorted by size and book-to-market ratio

This table reports average excess returns for the 52-week high zero-cost industry momentum strategy in

months classified as representing a high or low industry return dispersion state. A period is classified as a

low (high) state if the estimated three-month moving average at time 1 of the measure for currency

RD is below (above) its median value. For compounding the three-month moving average of cross-

sectional return dispersion, I employed 25 value weighted Fama and French portfolios sorted by size and

book-to-market ratio. The data were downloaded from Kanneth French website. The regression equations

in Panel B control for the excess returns of the CRSP index. The t-statistics are based on

heteroscedasticity and autocorrelation consistent standard errors in Newey and West (1987).

The

columns headed High-Low test the hypothesis that the difference of the estimated parameters in the high

state minus low state equals zero. The sample is from July 1928 until August 2015.

High state

Low state

High-Low

0.61***

0.61**

-0.00

(6.64)

(2.18)

(-0.02)

Risk-managed

0.85***

0.50***

0.36*

strategy

(7.32)

(2.64)

(1.66)

Plain strategy

High state

Low state

High-Low

0.87***

0.82***

0.05

(8.40)

(3.40)

(0.17)

Risk-managed

1.01***

0.61***

0.40**

strategy

(8.77)

(3.62)

(1.96)

Plain strategy

** Statistically significant on a 1% level.

* Statistically significant on a 10% level.

29

This figure plots the three-month moving averages of the cross-sectional return dispersion of the 48 Fama

and French value-weighted industry portfolios (RD 1) and three-month moving averages of the crosssectional return dispersion of the 25 Fama and French value-weighted portfolios sorted by size and bookto-market ratio.

4,5

4

3,5

3

2,5

RD 1

2

RD 2

1,5

1

0,5

0

192809

194505

196201

197809

30

199505

201201

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