Momentum's Hidden Sensitivity to the Starting Day
NYU Poly - Department of Finance and Risk Engineering
Gregg S. Fisher
June 7, 2013
Journal of Investing, Forthcoming
We show that the profitability of time-series momentum strategies on commodity futures across their entire history is strongly sensitive to the starting day. Using daily returns with 252-day formation periods and 21-day holding periods, the Sharpe ratio depends on whether one starts on the first day, the second day, and so on, until the twenty first day. This sensitivity is higher for shorter trading periods. The same results also hold in simulation of independent and identically lognormally distributed returns, showing that this is not only an empirical pattern but a fundamental issue with momentum strategies. Portfolio managers should be aware of this latent risk: starting trading the same strategy on the same underlying but one day later could, even after many decades, turn a successful strategy into an unsuccessful one.
Number of Pages in PDF File: 16
Keywords: momentum, portfolio management, sensitivity, risk, initial conditions, starting dayAccepted Paper Series
Date posted: July 31, 2011 ; Last revised: June 17, 2013
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