Horse race of weekly idiosyncratic momentum strategies with respect to various risk metrics: Evidence from the Chinese stock market

TL;DR

This study evaluates weekly idiosyncratic momentum strategies in the Chinese stock market, analyzing their performance relative to various risk metrics and exploring underlying explanations for observed effects.

Contribution

It provides a comprehensive comparison of IMOM portfolios based on different risk metrics and investigates factors influencing their profitability in the Chinese market.

Findings

IMOM effect and contrarian effect are prevalent.

Negative correlation between most risk metrics and returns, especially IVol and IMDs.

Higher profitability linked to upside markets, liquidity, and investor sentiment.

Abstract

This paper focuses on the horse race of weekly idiosyncratic momentum (IMOM) with respect to various idiosyncratic risk metrics. Using the A-share individual stocks in the Chinese market from January 1997 to December 2017, we first evaluate the performance of the weekly momentum based on raw returns and idiosyncratic returns, respectively. After that the univariate portfolio analysis is conducted to investigate the return predictability with respect to various idiosyncratic risk metrics. Further, we perform a comparative study on the performance of the IMOM portfolios with respect to various risk metrics. At last, we explore the possible explanations to IMOM as well as risk based IMOM portfolios. We find that 1) there are prevailing contrarian effect and IMOM effect for the whole sample; 2) the negative relations exist between most of the idiosyncratic risk metrics and the cross-sectional stock returns, and better performance is linked to idiosyncratic volatility (IVol) and maximum drawdowns (IMDs); 3) additionally, the IVol-based and IMD-based IMOM portfolios exhibit better explanatory power to the IMOM portfolios with respect to other risk metrics; 4) finally, higher profitability of IMOM as well as IVol-based and IMD-based IMOM portfolios is found to be related to upside market states, high levels of liquidity and high levels of investor sentiment.