Scientific Beta

In this paper, we study momentum crashes in Australian equities and evaluate an implementable volatility-managed overlay for momentum strategies.

In this paper, we study momentum crashes in Australian equities and evaluate an implementable volatility-managed overlay for momentum strategies.

Momentum crashes cluster in states with elevated volatility and market rebounds, making them partly forecastable. We design a simple volatility-control mechanism that scales exposure to a momentum index and reallocates to cash when forecast volatility exceeds a target, thereby capping portfolio volatility while preserving exposure to the momentum premium.

Using daily Australian data from July 2005 to March 2025, we show that the overlay mitigates the absolute severity of momentum crashes and lowers volatility, drawdowns, and tail losses, while maintaining comparable average returns and improving Sharpe ratios relative to a static momentum index.

The approach reduces effective market exposure in turbulent states without eliminating momentum exposure.
The results generalise out-of-sample using U.S. evidence, where the same overlay reduces drawdowns and raises risk-adjusted performance.

Overall, volatility-aware scaling improves the investability of momentum by curbing crash risk without materially diluting exposure to the momentum premium.