The Impact of Volatility Management on Momentum Strategies Performance Across Economic Cycles

Abstract

This thesis studies whether adjusting momentum strategies for market volatility can make them more reliable. Momentum strategies, which buy past winners and sell past losers, often deliver strong returns but face two main problems: sudden crashes during volatile periods and unstable results across economic cycles. To address this, a volatility-managed momentum strategy is applied. It works by reducing exposure when market volatility is high and increasing it when conditions are calmer. The analysis uses factor data from the JKP Global Factor Library and economic cycle data from FRED, focusing on five European markets: Belgium, France, Germany, Italy, and the United Kingdom. The results show that volatility management improves momentum performance in all countries, leading to higher risk-adjusted returns, smaller drawdowns, and more stable outcomes. These improvements remain significant even after accounting for the main equity factors, making volatility management a practical way to strengthen momentum strategies.