Market volatility, momentum, and reversal: a switching strategy

Momentum profits collapse and reversal occurs when preceding market volatility is relatively high. Based on these intertemporal patterns, we implement an investment strategy that switches from momentum to reversal when volatility is high. The proposed switching strategy has two advantages over scaled momentum strategies: (1) the leverage factor is constant, and (2) no ex post information is used to control volatility. Additionally, in US stock market tests, the switching strategy eliminates losses due to momentum crashes, a problem that has plagued momentum strategies in practice. Further evidence confirms that the switching strategy is successful in other developed and emerging stock markets.