Risk-Neutral Momentum and Market Fear

This study models a link between ex-ante autocorrelation in expected returns and risk-neutral momentum, enabling a straightforward interpretation of market sentiment. Correspondingly, concepts of fractal Brownian motion are applied to option implied volatility term structures. Based on an empirical investigation of daily SP500 and Euro Stoxx 50 data (2006–2018), we find that the expected return momentum varies over time, as fear spreads much faster than investor confidence can be regained. Thus, we conclude that risk-neutral momentum is a novel perspective for further research in the fields of risk management, asset allocation, and behavioral finance.