Abstract

http://ssrn.com/abstract=2076622
 
 

Citations (5)



 


 



Tail Risk in Momentum Strategy Returns


Kent D. Daniel


Columbia Business School - Finance and Economics; National Bureau of Economic Research (NBER)

Ravi Jagannathan


Northwestern University - Kellogg School of Management; National Bureau of Economic Research (NBER); SAIF; ISB

Soohun Kim


Northwestern University, Kellogg School of Management, Department of Finance

June 1, 2012


Abstract:     
Price momentum strategies have historically generated high positive returns with little systematic risk. However, these strategies also experience infrequent but severe losses. During 13 of the 978 months in our 1929-2010 sample, losses to a US-equity momentum strategy exceed 20 percent per month. We demonstrate that a hidden Markov model in which the market moves between latent "turbulent'' and "calm'' states in a systematic stochastic manner captures these high-loss episodes. The turbulent state is infrequent in our sample: the probability that the hidden state is turbulent is greater than one-half in only 20% of the months in our sample. Yet in each of the 13 severe loss months, the ex-ante probability that the hidden state is turbulent exceeds 70 percent. This strong forecastability accentuates the price momentum puzzle.

Number of Pages in PDF File: 35

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Date posted: June 5, 2012  

Suggested Citation

Daniel, Kent D. and Jagannathan, Ravi and Kim, Soohun, Tail Risk in Momentum Strategy Returns (June 1, 2012). Available at SSRN: http://ssrn.com/abstract=2076622 or http://dx.doi.org/10.2139/ssrn.2076622

Contact Information

Kent D. Daniel (Contact Author)
Columbia Business School - Finance and Economics ( email )
3022 Broadway
New York, NY 10027
United States
212-854-4679 (Phone)
212-854-4679 (Fax)
HOME PAGE: http://www.columbia.edu/~kd2371/

National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
Ravi Jagannathan
Northwestern University - Kellogg School of Management ( email )
2001 Sheridan Road
429 Andersen Hall
Evanston, IL 60208
United States
847-491-8338 (Phone)
847-491-5719 (Fax)
National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
SAIF ( email )
Shanghai
China
ISB ( email )
Hyderabad, Gachibowli 500 019
India
Soohun Kim
Northwestern University, Kellogg School of Management, Department of Finance ( email )
Evanston, IL 60208
United States
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