Abstract

http://ssrn.com/abstract=2140091
 
 

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Improving Time-Series Momentum Strategies: The Role of Volatility Estimators and Trading Signals


Akindynos-Nikolaos Baltas


UBS AG; Imperial College Business School

Robert Kosowski


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

July 30, 2013


Abstract:     
The aim of this paper is to examine the effect of risk-weighting and of the choice of trading signal on the performance of time-series momentum strategies using a broad dataset of 75 futures contracts over the period 1974-2013. Time-series momentum strategies have received increased attention after they provided again, as in previous business cycle downturns, impressive diversification benefits during the recent financial crisis in 2008. Motivated by recent asset pricing literature that examines the effect of frictions on asset prices and the link between portfolio volatility and turnover, we highlight the effect of the choice of volatility estimator and trading signal on turnover and performance of time-series momentum strategies. We find that by increasing the efficiency of volatility estimation using estimators with desirable theoretical properties, such as range-based estimators, the net of transaction costs performance improves, but the effect on turnover is relatively small compared to that of the trading signal. Momentum trading signals generated by fitting a linear trend on the asset price path maximise the out-of-sample performance by reducing portfolio turnover by about two thirds, hence dominating other momentum trading signals commonly used in the literature.

Number of Pages in PDF File: 35

Keywords: Trend-following, Momentum, Managed Futures, Volatility Estimation, Trading Signal, Transaction Costs

JEL Classification: D23, E3, G14

working papers series


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Date posted: September 2, 2012 ; Last revised: July 31, 2013

Suggested Citation

Baltas, Akindynos-Nikolaos and Kosowski, Robert, Improving Time-Series Momentum Strategies: The Role of Volatility Estimators and Trading Signals (July 30, 2013). Available at SSRN: http://ssrn.com/abstract=2140091 or http://dx.doi.org/10.2139/ssrn.2140091

Contact Information

Akindynos-Nikolaos Baltas (Contact Author)
UBS AG ( email )
1 Finsbury Avenue
London, EC2M 2PP
United Kingdom
+442075683072 (Phone)
Imperial College Business School ( email )
South Kensington Campus
Exhibition Road
London, SW7 2AZ
United Kingdom
+442075949109 (Phone)
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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