Abstract

http://ssrn.com/abstract=2140091
 


 



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


Nick Baltas


Imperial College Business School; Queen Mary, University of London

Robert Kosowski


Imperial College Business School; CEPR (Centre for Economic Policy Research); University of Oxford, Oxford-Man Institute of Quantitative Finance

October 1, 2015


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 their turnover and performance from 1974 until 2013. We show that more efficient volatility estimation and price trend detection significantly reduce portfolio turnover and therefore rebalancing costs. The poor performance of time-series momentum strategies during the post-2008 period is explained by an increased level of pairwise correlations. We propose a novel correlation-based leverage-adjustment to the strategy's weighting scheme and show that it improves performance by safeguarding against tail risk, even after accounting for realistic transaction costs.

Number of Pages in PDF File: 46

Keywords: Trend-following, Momentum, Constant-volatility, Volatility-targeting, Trading rules, Pairwise correlations, Diversification, Transaction costs, Turnover

JEL Classification: E37, G11, G15, F37


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Date posted: September 2, 2012 ; Last revised: October 12, 2015

Suggested Citation

Baltas, Nick and Kosowski, Robert, Demystifying Time-Series Momentum Strategies: Volatility Estimators, Trading Rules and Pairwise Correlations (October 1, 2015). Available at SSRN: http://ssrn.com/abstract=2140091 or http://dx.doi.org/10.2139/ssrn.2140091

Contact Information

Nick Baltas (Contact Author)
Imperial College Business School ( email )
South Kensington Campus
Exhibition Road
London, SW7 2AZ
United Kingdom
Queen Mary, University of London ( email )
Lincoln's Inn Fields
Mile End Rd.
London, E1 4NS
United Kingdom
HOME PAGE: http://econ.qmul.ac.uk/staff/nickbaltas.html
Robert Kosowski
Imperial College Business School ( email )
South Kensington Campus
Exhibition Road
London SW7 2AZ, DC SW7 2AZ
United Kingdom
+442075943294 (Phone)
HOME PAGE: http://www3.imperial.ac.uk/people/r.kosowski
CEPR (Centre for Economic Policy Research) ( email )
77 Bastwick Street
London, EC1V 3PZ
United Kingdom
HOME PAGE: http://www.cepr.org/
University of Oxford, Oxford-Man Institute of Quantitative Finance ( email )
Eagle House
Walton Well Road
Oxford, Oxfordshire OX2 6ED
United Kingdom
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