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

60 Pages Posted: 2 Sep 2012 Last revised: 10 May 2017

Nick Baltas

Imperial College Business School; Goldman Sachs International

Robert Kosowski

Imperial College Business School; CEPR (Centre for Economic Policy Research); University of Oxford, Oxford-Man Institute of Quantitative Finance

Date Written: May 8, 2017

Abstract

Motivated by studies of the impact of frictions on asset prices, we examine the effect of key components of time-series momentum strategies on their turnover and performance from 1984 until 2013. We show that more efficient volatility estimation and price trend detection can significantly reduce portfolio turnover by more than one third, without causing a statistically significant performance penalty. We shed light on the post-2008 underperformance of the strategy by linking it to the increased level of asset co-movement. We propose a novel implementation of the strategy that incorporates the pairwise signed correlations by means of a dynamic leverage mechanism. The correlation-adjusted variant outperforms the naive implementation of the strategy and the outperformance is more pronounced in the post-2008 period. Finally, using a transaction costs model for futures-based strategies that separates costs into roll-over and rebalancing costs, we show that our findings remain robust to the inclusion of transaction costs.

Keywords: Trend-following, Momentum, Constant-volatility, Volatility-targeting, Trading rules, Pairwise correlations, Diversification, Transaction costs, Turnover

JEL Classification: E37, G11, G15, F37

Suggested Citation

Baltas, Nick and Kosowski, Robert, Demystifying Time-Series Momentum Strategies: Volatility Estimators, Trading Rules and Pairwise Correlations (May 8, 2017). Available at SSRN: https://ssrn.com/abstract=2140091 or http://dx.doi.org/10.2139/ssrn.2140091

Nick Baltas (Contact Author)

Imperial College Business School ( email )

South Kensington Campus
Exhibition Road
London, SW7 2AZ
United Kingdom

Goldman Sachs International

Peterborough Court
133 Fleet Street
London, EC4A 2BB
United Kingdom

Robert Kosowski

Imperial College Business School ( email )

South Kensington Campus
Exhibition Road
London SW7 2AZ, SW7 2AZ
United Kingdom
+442075943294 (Phone)

HOME PAGE: http://www3.imperial.ac.uk/people/r.kosowski

CEPR (Centre for Economic Policy Research) ( email )

77 Bastwick Street
London, EC1V 3PZ
United Kingdom

HOME PAGE: http://www.cepr.org/

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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