Quality, Momentum, and Tail Risk

We augment the standard market model for stock returns with rm quality as a latent variable to capture the common wisdom that higher quality rms should perform better during relatively bad-times. Consistent with our model, rms with superior performance during the worst month in a year tend to be of higher quality according to commonly used measures. Further, our model implies that price momentum strategy winners will be of higher quality, for which we nd empirical support, thereby establishing a commonality with quality investing. A long-short portfolio based on worst-month performance has a signcant Fama and French (2015) five factor alpha.