Market volatility and momentum

We investigate the predictive power of market volatility for momentum. We find that (1) market volatility has significant power to forecast momentum payoffs, which is robust after controlling for market state and business cycle variables; (2) market volatility absorbs much of the predictive power of market state; (3) after controlling for market volatility and market state, other variables do not have incremental predictive power; (4) the time-series predictive power of market volatility is centered on loser stocks; and (5) default probability helps explain the predictive power of market volatility for momentum. These findings jointly present a significant challenge to existing theories on momentum.