How does volatility affect momentum in Swedish large-cap stocks?

Abstract

This study examines how market volatility influences the performance of momentum strategies in Swedish large-cap stocks. Using a dataset consisting of the 50 largest stocks on the Swedish stock market, we implement a momentum strategy based on historical 6-month returns from 2008 to 2025, and examines the strategy’s relationship with market volatility, with the VIX index serving as a measure of market volatility. We estimate both explanatory and predictive regression models. The results indicate that elevated volatility weakens momentum performance, with both predictive and explanatory regression models showing that higher volatility levels are associated with weaker momentum returns. Notably, sudden spikes in volatility appear to have the biggest impact on the strategy’s performance. These findings suggest that fear and uncertainty disrupt the price trends which momentum strategies rely on. The results challenge the efficient market hypothesis by revealing that short-term momentum performance can, among other factors, be predicted by volatility measures. The results align with theories of behavioral finance that emphasize the role of investor psychology. Overall, the study highlights the vulnerability of momentum strategies during turbulent markets, highlighting the importance of incorporating volatility filters in momentum trading.