Hedging the Time-Varying Risk Exposures of Momentum Returns

26 Pages Posted: 6 Mar 2008 Last revised: 12 Oct 2012

See all articles by Martin Martens

Martin Martens

Erasmus University Rotterdam (EUR); Robeco Asset Management

Arco van Oord

De Nederlandsche Bank

Date Written: October 11, 2012

Abstract

Momentum returns have time-varying exposures to the three Fama and French equity risk factors. In particular factor loadings are higher when the factor returns during the ranking period are higher. In this study we look at momentum returns after hedging the time-varying exposures to the Fama and French factors. We find that specifically taking into account the conditional nature of the time-variation in factor loadings is the best way to hedge. The hedged momentum returns are higher, less risky, more stable over time and vary less over different market conditions. Determining momentum betas based on estimated individual stock betas leads to large systematic biases and hence is less effective in hedging.

Keywords: Momentum, hedging, conditional factor model

JEL Classification: G14, G12, E32

Suggested Citation

Martens, Martin P.E. and van Oord, Arco J.A., Hedging the Time-Varying Risk Exposures of Momentum Returns (October 11, 2012). Available at SSRN: https://ssrn.com/abstract=1099932 or http://dx.doi.org/10.2139/ssrn.1099932

Martin P.E. Martens (Contact Author)

Erasmus University Rotterdam (EUR) ( email )

P.O. Box 1738
3000 DR Rotterdam
Netherlands
+31 10 408 1253 (Phone)
+31 10 408 9162 (Fax)

Robeco Asset Management ( email )

Rotterdam, 3011 AG
Netherlands

Arco J.A. Van Oord

De Nederlandsche Bank ( email )

PO Box 98
1000 AB Amsterdam
Amsterdam, 1000 AB
Netherlands

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