Robust Optimization of the Equity Momentum Strategy

Tinbergen Institute Discussion Paper No. 09-011/4

17 Pages Posted: 14 Feb 2009

See all articles by Arco van Oord

Arco van Oord

De Nederlandsche Bank

Martin Martens

Robeco Asset Management

H. K. van Dijk

Tinbergen Institute; Econometric Institute

Date Written: February 12, 2009

Abstract

Quadratic optimization for asset portfolios often leads to error maximization, with optimizers zooming in on large errors in the predicted inputs, that is, expected returns and risks. The consequence in most cases is a poor real-time performance. In this paper we show how to improve real-time performance of the popular equity momentum strategy with robust optimization in an empirical application involving 1500-2500 US stocks over the period 1963-2006. We also show that popular procedures like Bayes-Stein estimated expected returns, shrinking the covariance matrix and adding weight constraints fail in such a practical case.

Keywords: quadratic optimization, momentum strategy, robust optimization

JEL Classification: G11

Suggested Citation

van Oord, Arco J.A. and Martens, Martin P.E. and van Dijk, Herman K., Robust Optimization of the Equity Momentum Strategy (February 12, 2009). Tinbergen Institute Discussion Paper No. 09-011/4, Available at SSRN: https://ssrn.com/abstract=1342405 or http://dx.doi.org/10.2139/ssrn.1342405

Arco J.A. Van Oord (Contact Author)

De Nederlandsche Bank ( email )

PO Box 98
1000 AB Amsterdam
Amsterdam, 1000 AB
Netherlands

Martin P.E. Martens

Robeco Asset Management ( email )

Weena 850
Rotterdam, 3014 DA
Netherlands

Herman K. Van Dijk

Tinbergen Institute ( email )

Gustav Mahlerplein 117
Burg. Oudlaan 50
Amsterdam/Rotterdam, 1082 MS
Netherlands
+31104088955 (Phone)
+31104089031 (Fax)

HOME PAGE: http://people.few.eur.nl/hkvandijk/

Econometric Institute ( email )

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