Demystifying Time-Series Momentum Strategies: Volatility Estimators, Trading Rules and Pairwise Correlations

"Market Momentum: Theory and Practice", Wiley, 2020 (Forthcoming)

49 Pages Posted: 2 Sep 2012 Last revised: 9 Sep 2019

See all articles by Nick Baltas

Nick Baltas

Imperial College Business School; Goldman Sachs International

Robert Kosowski

Imperial College Business School; CEPR (Centre for Economic Policy Research)

Date Written: September 8, 2019

Abstract

Motivated by studies of the impact of frictions on asset prices, we examine the effect of key components of time-series momentum strategies on turnover and performance. We show that more efficient volatility estimation and price trend detection can significantly reduce portfolio turnover by more than one third, without causing statistically significant performance degradation. We propose a novel implementation of the strategy that incorporates the pairwise signed correlations by means of a dynamic leverage mechanism. The correlation-adjusted variant outperforms the naive implementation of the strategy and the outperformance is more pronounced in the post-2008 period. Finally, using a transaction costs model for futures-based strategies that separates costs into roll-over and rebalancing costs, we show that our findings remain robust to the inclusion of transaction costs.

Keywords: Time-series Momentum, Trend Following, Trading Rules, Pairwise Correlations, Turnover, Transaction Costs

JEL Classification: E37, G11, G15, F37

Suggested Citation

Baltas, Nick and Baltas, Nick and Kosowski, Robert, Demystifying Time-Series Momentum Strategies: Volatility Estimators, Trading Rules and Pairwise Correlations (September 8, 2019). "Market Momentum: Theory and Practice", Wiley, 2020 (Forthcoming), Available at SSRN: https://ssrn.com/abstract=2140091 or http://dx.doi.org/10.2139/ssrn.2140091

Nick Baltas (Contact Author)

Goldman Sachs International

Peterborough Court
133 Fleet Street
London, EC4A 2BB
United Kingdom

Imperial College Business School ( email )

South Kensington Campus
Exhibition Road
London, SW7 2AZ
United Kingdom

Robert Kosowski

Imperial College Business School ( email )

South Kensington Campus
Exhibition Road
London SW7 2AZ, SW7 2AZ
United Kingdom
+442075943294 (Phone)

HOME PAGE: http://www3.imperial.ac.uk/people/r.kosowski

CEPR (Centre for Economic Policy Research) ( email )

London
United Kingdom

HOME PAGE: http://www.cepr.org/

Do you have negative results from your research you’d like to share?

Paper statistics

Downloads
13,974
Abstract Views
195,183
Rank
577
PlumX Metrics