Return and Risk-Return Ratio Based Momentum Strategies: A Fresh Perspective

Journal of Finance and Investment Analysis, Vol. 2, No. 1, pp 1-13, 2013

13 Pages Posted: 24 Dec 2012 Last revised: 20 Feb 2013

See all articles by Chia Rui Ming Daryl

Chia Rui Ming Daryl

University of Warwick - Department of Statistics

Lim Kai Jie Shawn

University College London - Department of Economics

Chan Ho Yan Sabrina

University of Cambridge

Date Written: December 1, 2012

Abstract

In this study, we contribute to existing literature on momentum strategies by assessing a modified version of risk-return ratio based security selection criterion in an untested market – the KOSPI 200 over June 2006 to June 2012. Besides conventional risk-return ratios such as the Sharpe ratio, we also employ the use of risk-return ratio based ranking criterion first introduced in Biglova et al. (2004) when ranking securities to form portfolios for these strategies. These ratios take into account the non-normality and kurtosis that are ubiquitous in equity time series returns. In contrast to their approach however, we invert the ordinal ranking of negative risk-return ratios to be consistent with the interpretation of negative ratios presented in Sharpe (1994). Applying these methods, this study quantifies and compares the performance of returns based and risk-return ratio based momentum strategies while estimating the transaction costs involved in implementing such strategies. For return based momentum strategies, we show that most strategies involving a 3 or 6 month formation period exhibit statistically significant positive returns, while those with a 9 or 12 month formation period do not. In addition, all risk-return ratio based strategies failed to generate returns that are significantly greater than zero.

Keywords: momentum strategies, risk-return ratio based selection criteria, portfolio turnover

JEL Classification: G11, G14

Suggested Citation

Rui Ming Daryl, Chia and Kai Jie Shawn, Lim and Ho Yan Sabrina, Chan, Return and Risk-Return Ratio Based Momentum Strategies: A Fresh Perspective (December 1, 2012). Journal of Finance and Investment Analysis, Vol. 2, No. 1, pp 1-13, 2013. Available at SSRN: https://ssrn.com/abstract=2193292

Chia Rui Ming Daryl

University of Warwick - Department of Statistics ( email )

Coventry CV4 7AL
United Kingdom

Lim Kai Jie Shawn (Contact Author)

University College London - Department of Economics ( email )

Gower Street
London WC1E 6BT, WC1E 6BT
United Kingdom

Chan Ho Yan Sabrina

University of Cambridge ( email )

Trinity Ln
Cambridge, CB2 1TN
United Kingdom

Register to save articles to
your library

Register

Paper statistics

Downloads
1,476
Abstract Views
5,872
rank
11,785
PlumX Metrics