Taming momentum crashes
Bianchi, Daniele and De Polis, Andrea and Petrella, Ivan (2022) Taming momentum crashes. Preprint / Working Paper. Social Science Research Network (SSRN), Rochester, NY. (https://doi.org/10.2139/ssrn.4182040)
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Abstract
The return on conventional momentum portfolios exhibits a predominantly negative, time-varying skewness, which deepens during the so-called momentum ``crashes''. This has important implications for the dynamic of the risk-return trade-off associated with momentum investing: the relationship between the strategy's expected return and volatility is time-varying and depends on conditional skewness. We explore the economic underpinnings of time-varying skewness by timing the capital exposure to momentum portfolios in response to fluctuations in risk. The results show that a dynamic skewness-adjusted maximum Sharpe ratio strategy significantly improves upon popular volatility scaling approaches. Finally, we show that the dynamic of the momentum return skewness cannot be fully reconciled with an asymmetric exposure to upside and downside market risk.
ORCID iDs
Bianchi, Daniele, De Polis, Andrea ORCID: https://orcid.org/0000-0002-0483-2643 and Petrella, Ivan;-
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Item type: Monograph(Preprint / Working Paper) ID code: 90217 Dates: DateEvent9 August 2022PublishedSubjects: Social Sciences > Economic Theory Department: Strathclyde Business School > Economics Depositing user: Pure Administrator Date deposited: 13 Aug 2024 11:14 Last modified: 15 Oct 2024 00:10 URI: https://strathprints.strath.ac.uk/id/eprint/90217