Abstract

http://ssrn.com/abstract=2371227
 
 

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Momentum Crashes


Kent D. Daniel


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

Tobias J. Moskowitz


University of Chicago - Booth School of Business

September 30, 2013

Swiss Finance Institute Research Paper No. 13-61
Columbia Business School Research Paper No. 14-6
Fama-Miller Working Paper

Abstract:     
Across numerous asset classes, momentum strategies have historically generated high Sharpe ratios and strong positive alphas relative to standard asset pricing models. However, the returns to momentum strategies are negatively skewed: they experience infrequent but strong and persistent strings of negative returns. These momentum crashes are partly forecastable. They occur in what we term “panic” states – following market declines and when market volatility is high, and are contemporaneous with market “rebounds.” We show that the low exante expected returns in panic states result from a conditionally high premium attached to the option-like payoffs of past losers. An implementable dynamic momentum strategy based on forecasts of each momentum strategy’s mean and variance generates an unconditional Sharpe ratio approximately double that of the static momentum strategy. Further, we show that momentum returns in panic states are correlated with, but not explained by, volatility risk. These results are robust across eight different markets and asset classes and multiple time periods.

Number of Pages in PDF File: 57

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Date posted: December 24, 2013  

Suggested Citation

Daniel, Kent D. and Moskowitz, Tobias J., Momentum Crashes (September 30, 2013). Swiss Finance Institute Research Paper No. 13-61; Columbia Business School Research Paper No. 14-6; Fama-Miller Working Paper. Available at SSRN: http://ssrn.com/abstract=2371227 or http://dx.doi.org/10.2139/ssrn.2371227

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
Tobias J. Moskowitz
University of Chicago - Booth School of Business ( email )
5807 S. Woodlawn Avenue
Chicago, IL 60637
United States
773-834-2757 (Phone)
773-702-0458 (Fax)
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