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

46 Pages Posted: 2 Sep 2012 Last revised: 12 Oct 2015

Nick Baltas

Imperial College Business School; UBS Investment Bank

Robert Kosowski

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

Date Written: October 1, 2015

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 1974 until 2013. We show that more efficient volatility estimation and price trend detection significantly reduce portfolio turnover and therefore rebalancing costs. The poor performance of time-series momentum strategies during the post-2008 period is explained by an increased level of pairwise correlations. We propose a novel correlation-based leverage-adjustment to the strategy's weighting scheme and show that it improves performance by safeguarding against tail risk, even after accounting for realistic 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 (October 1, 2015). 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

UBS Investment Bank ( email )

1 Finsbury Avenue
London, EC2M 2PP
United Kingdom
+442075683072 (Phone)

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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