Abstract

http://ssrn.com/abstract=2140091
 
 

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


Akindynos-Nikolaos (Nick) Baltas


UBS Investment Bank; Queen Mary University of London; Imperial College Business School

Robert Kosowski


Imperial College Business School; University of Oxford, Oxford-Man Institute of Quantitative Finance

June 3, 2014


Abstract:     
Motivated by the recent asset pricing literature that examines the effect of frictions on asset prices, we examine the effect of volatility estimation error, trading rule and pairwise correlations on turnover and performance of time-series momentum strategies from 1974 until 2013. Volatility estimators with desirable theoretical properties, such as range-based estimators, improve the performance of the strategies after transaction costs. Price trend-based momentum trading rules lead to the highest out-of-sample performance, because they reduce portfolio turnover significantly. A weighting scheme that incorporates pairwise correlations sheds light on recent performance drivers and improves performance during the post 2008 financial crisis period.

Number of Pages in PDF File: 42

Keywords: Trend-following, Momentum, Constant-volatility, Volatility-targeting, Volatility-timing, Volatility estimation, Trading rules, Correlation, Diversification, Transaction costs, Turnover

JEL Classification: G11, G12, C13, C22

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Date posted: September 2, 2012 ; Last revised: June 3, 2014

Suggested Citation

Baltas, Akindynos-Nikolaos (Nick) and Kosowski, Robert, Demystifying Time-Series Momentum Strategies: Volatility Estimators, Trading Rules and Pairwise Correlations (June 3, 2014). Available at SSRN: http://ssrn.com/abstract=2140091 or http://dx.doi.org/10.2139/ssrn.2140091

Contact Information

Akindynos-Nikolaos (Nick) Baltas (Contact Author)
UBS Investment Bank ( email )
1 Finsbury Avenue
London, EC2M 2PP
United Kingdom
+442075683072 (Phone)
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
Imperial College Business School ( email )
South Kensington Campus
Exhibition Road
London, SW7 2AZ
United Kingdom
HOME PAGE: http://www3.imperial.ac.uk/people/a.baltas07
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
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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