19 Pages Posted: 25 Dec 2012 Last revised: 16 Jan 2015
Date Written: December 24, 2012
In this paper we extend the timeseries momentum (or trendfollowing) model towards a generalized momentum model, called Flexible Asset Allocation (FAA). This is done by adding new momentum factors to the traditional momentum factor R based on the relative returns among assets. These new factors are called Absolute momentum (A), Volatility momentum (V) and Correlation momentum (C). Each asset is ranked on each of the four factors R, A, V and C. By using a linearised representation of a loss function representing risk/return, we are able to arrive at simple closed form solutions for our flexible asset allocation strategy based on these four factors. We demonstrate the generalized momentum model by using a 7 asset portfolio model, which we backtest from 1998-2012, both in- and out-of-sample.
Keywords: Tactical Asset Allocation, momentum, trendfollowing
JEL Classification: C00, C10, G00, G11
Suggested Citation: Suggested Citation
Keller, Wouter J. and van Putten, Hugo S., Generalized Momentum and Flexible Asset Allocation (FAA): An Heuristic Approach (December 24, 2012). Available at SSRN: https://ssrn.com/abstract=2193735 or http://dx.doi.org/10.2139/ssrn.2193735