Risk Adjusted Momentum Strategies: A Comparison between Constant and Dynamic Volatility Scaling Approaches

Fan, Minyou; Li, Youwei; Liu, Jiadong

doi:10.2139/ssrn.3076715

Cited by 6 publications

(10 citation statements)

References 25 publications

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“…The momentum effect can be regarded as a phenomenon proven on the market. From the investors' point of view, it enables the formation of investment strategies for market outperformance (Chordia and Shivakumar, 2012;Celiker et al, 2016;Fan et al, 2018). In the following section, a rolling momentum strategy is created and tested with regard to its performance capability.…”

Section: Scientific Discussion Of the Momentum Strategymentioning

confidence: 99%

“…Overall, regardless of its causes and scientific explanations, the momentum effect can be regarded as a phenomenon proven on the market. From the investors' point of view, the momentum effect enables the formation of corresponding investment strategies for market outperformance (Chordia and Shivakumar, 2012;Celiker et al, 2016;Fan et al, 2018;Schubert et al, 2018). Therefore, in this paper, a rolling momentum strategy is created, which is tested with regard to its performance capabilities, taking into account the above findings.…”

Section: Introductionmentioning

confidence: 99%

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Rolling Momentum Strategy: An Empirical Analysis

et al. 2021

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Research background: The focus of the momentum strategy, as a procyclical investment strategy, lies in the hypothesis that the winning shares of the past will most likely develop in the same direction in the near future. The same is assumed for the performance of the loser shares. The technical trading rules of relative strength according to Levy provide the basis for this approach (Levy, 1967). The momentum strategy can thus offer investors an opportunity to outperform the market. The creation of portfolios under the momentum strategy follows simple rules: On the basis of past prices, equities are selected within a formation period according to return criteria. The stocks with the highest and lowest returns on equities in the formation period are combined into winning and losing portfolios, each with the same number. The final step is the acquisition of the winning portfolio, which is held over the specified investment period, with the loser portfolio being sold short at the same time. The empirical analysis presented in this paper focuses on the success of the momentum strategy for the STOXX Europe 600 market over a formation and investment period of six months. Purpose of the article: The objective of this paper is to empirically test the above statements and assumptions. Portfolios are built up on a rolling basis over a period of six months and then observed with respect to their performance over a period from 1995 to 2000. The achieved returns are compared with a buy-and-hold strategy and empirically tested for return differences. Especially the years 2001, 2008, and 2020 as the crisis years of the dot-com bubble, the financial crisis, and the COVID-19 pandemic are focused on and discussed. Methods: The data of the period are examined for performance development in a database in the form of winner and loser portfolios. The returns are calculated as AR to a reference portfolio DAX. The returns are statistically tested for significant differences to a zero return using a t test. Findings & Value added: The results show the performance of the momentum strategy in the period from 1995 to 2000 for the stocks of the STOXX Europe 600. The strong fluctuations in the crisis years are notable. With few exceptions, the reference returns could only provide statistically non-significant results.

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Section: Scientific Discussion Of the Momentum Strategymentioning

confidence: 99%

Section: Introductionmentioning

confidence: 99%

Rolling Momentum Strategy: An Empirical Analysis

et al. 2021

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“…Regarding the higher moment statistics, the FMOM strategies generate lower skewness and kurtosis than the BAH strategies. Lower skewness indicates that the FMOM strategies are less attractive than the BAH (Barroso & Santa‐Clara, 2015; Daniel & Moskowitz, 2016; Fan et al., 2018). Our results conclude that the profitability of factor momentum is weaker than the corresponding BAH strategy.…”

Section: Does the Choice Of Factors Matter?mentioning

confidence: 99%

A reexamination of factor momentum: How strong is it?

Fan

Liao

et al. 2022

The Financial Review

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Recent studies show that most financial market anomalies exhibit a momentum effect. Based on two datasets, (i) an original 22-factor sample and (ii) a more comprehensive 187-factor sample, we find that factor momentum effect is weak at the individual factor level. In both samples, only about 22%-27% of the factors exhibit strong return continuation and dominate the factor momentum portfolio while the remaining factors do not. The factor momentum strategies do not outperform the corresponding long-only strategies in either sample. The choice of factors affects the ability of factor momentum to explain individual stock momentum.

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“…More recently, many academic studies report the crash risks associated with conventional momentum strategies (Barroso & Maio, 2019; Barroso & Santa-Clara, 2015; Chabot et al, 2014; Daniel & Moskowitz, 2016; Dobrynskaya, 2015, 2019; Fan et al, 2018; Gaunt, 2016; Grobys et al, 2018; Moreira & Muir, 2017). Barroso and Santa-Clara reveal that relative momentum delivers a return of −73.42% in just two months of the year 2009.…”

Section: Prior Synthesismentioning

confidence: 99%

“…In contrast, Daniel and Moskowitz (2016) propose dynamic volatility-scaled momentum portfolios. Fan et al (2018) compare both of these volatility-scaled approaches and document that dynamic volatility-scaled portfolios perform better. Based on the work of Daniel and Moskowitz (2016), Grobys et al (2018) propose a risk-managed industry momentum approach.…”

Section: Prior Synthesismentioning

confidence: 99%

Risk-Managed Momentum: An Evidence from Indian Stock Market

Singh

Walia

Panda³

et al. 2021

FIIB Business Review

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Relative momentum strategies yield large and substantial profits in the Indian Stock Market. Nevertheless, relative momentum profits are negatively skewed and prone to occasional severe losses. By taking into consideration 450 stocks listed on the Bombay Stock Exchange, the present study predicts the timing of these huge momentum losses and proposes a simple risk-managed momentum approach to avoid these losses. The proposed risk-managed momentum approach not only doubles the adjusted Sharpe ratio but also results in significant improvements in downside risks. In contrast to relative momentum payoffs, risk-managed momentum payoffs remain substantial even in extended time frames. The study’s findings are particularly relevant for asset management companies, fund houses and financial academicians working in the area of asset anomalies.

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Risk Adjusted Momentum Strategies: A Comparison between Constant and Dynamic Volatility Scaling Approaches

Cited by 6 publications

References 25 publications

Rolling Momentum Strategy: An Empirical Analysis

Rolling Momentum Strategy: An Empirical Analysis

A reexamination of factor momentum: How strong is it?

Risk-Managed Momentum: An Evidence from Indian Stock Market

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