Momentum crashes in Korean stock market

Abstract

This study investigates momentum crashes in Korean stock market following up the Kent Daniel (2016) paper. We find that the momentum crashes always happen during the bear market states with high market volatility. Especially, during the market upswings period, the loser portfolio has better performance than winner portfolio. Moreover, the momentum crashes themselves are predictable. When we apply the bear market indicator and ex ante estimated volatility to compute the conditional mean and conditional variance of momentum strategy. Those two elements help us build a dynamic weighting strategy to improve the momentum strategy performance. The results show that the Shape ratio of dynamic strategy is twice bigger than the constant volatility strategy. In the spanning test, the dynamic strategy market model alpha and constant volatility model alpha are both significant and positive.