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Improving momentum strategies using residual returns and option‐implied information

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  • Ming‐Yu Liu
Abstract
This paper provides an alternative method for enhancing momentum profits by combining residual returns and option‐implied information. The results show that the main benefit of applying residual returns to construct momentum portfolios is generating stable returns. Additionally, the incorporation of implied volatility (IV) spread or IV skew into a residual momentum portfolio is found to significantly raise profits, particularly during bad times and high‐sentiment periods. This is because IV spread and IV skew can dissociate winners/losers with a price underreaction from those with a price overreaction, which suggests that informed traders who perceive price underreactions/overreactions trade in option markets.

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  • Ming‐Yu Liu, 2019. "Improving momentum strategies using residual returns and option‐implied information," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 39(4), pages 499-521, April.
    • Handle: RePEc:wly:jfutmk:v:39:y:2019:i:4:p:499-521
    DOI: 10.1002/fut.21988
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    References listed on IDEAS

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    1. Martin Wallmeier, 2024. "Quality issues of implied volatilities of index and stock options in the OptionMetrics IvyDB database," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 44(5), pages 854-875, May.

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