Momentum Has Its Moments
UNSW Australia Business School, School of Banking and Finance
New University of Lisbon - Nova School of Business and Economics; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)
Journal of Financial Economics (JFE), Forthcoming
Compared with the market, value, or size factors, momentum has offered investors the highest Sharpe ratio. However, momentum has also had the worst crashes, making the strategy unappealing to investors who dislike negative skewness and kurtosis. We find that the risk of momentum is highly variable over time and predictable. Managing this risk virtually eliminates crashes and nearly doubles the Sharpe ratio of the momentum strategy. Risk-managed momentum is a much greater puzzle than the original version.
Number of Pages in PDF File: 39
Keywords: Stock momentum, risk management, anomalies
JEL Classification: G11, G12, G14, G17Accepted Paper Series
Date posted: April 18, 2012 ; Last revised: December 10, 2014
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