Size, Value, and Momentum Risk in the Cross-Section of Average Returns and Volatility

Abstract

We examine the incremental cross-sectional role of several common risk factors related to size, book-to-market, and momentum in size-and-momentum-sorted portfolios. Unlike the existing literature, which focuses on the conditional mean specification only, we evaluate the common risk factors’ incremental explanatory power in the cross-sectional characterization of both average return and conditional volatility. We also investigate the role of ex-ante market risk in the cross-section. The empirical results demonstrate that the size-and-momentum-based risk factors explain a significant portion of the cross-sectional average returns and cross-sectional conditional volatility of the benchmark equity portfolios. We find that the Fama–French (1993) factors and the ex-ante market risk are priced in the cross-sectional conditional volatility. We conclude that the size-and-momentum-based factors provide a source of risk that is independent of the Fama–French factors as well as ex-post and ex-ante market risk. Our results bolster the risk-based explanation of the size and momentum effects.

Citation

Lindaas, K.F. and Simlai, P. (2016), "Size, Value, and Momentum Risk in the Cross-Section of Average Returns and Volatility", The Spread of Financial Sophistication through Emerging Markets Worldwide (Research in Finance, Vol. 32), Emerald Group Publishing Limited, Leeds, pp. 109-144. https://doi.org/10.1108/S0196-382120160000032005