Time-Varying Skewness and Momentum Crashes

Abstract

Returns on conventional momentum portfolios exhibit time-varying skewness that deepens during momentum crashes. We exploit this feature and propose a crash indicator—based on the interaction between conditional volatility and skewness—that provides a measure of downside risk directly from the return distribution. This indicator significantly predicts left-tail realizations of momentum returns, especially at daily frequency, capturing information about crash risk beyond volatility alone. Building on this predictability, a skewness-based dynamic allocation improves daily downside risk management and earns significant alphas over existing momentum-timing approaches. We also show that momentum skewness cannot be fully reconciled with asymmetric market exposure.

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Citation

Bianchi, Daniele, Andrea Depolis, and Ivan Petrella. Time-Varying Skewness and Momentum Crashes. The Review of Asset Pricing Studies, forthcoming.

@article{bianchi2022taming,
  title={Time-Varying Skewness and Momentum Crashes},
  author={Bianchi, Daniele and De Polis, Andrea and Petrella, Ivan},
  journal={The Review of Asset Pricing Studies},
  note={Forthcoming},
  year={2026}
}