Absolute Momentum: A Simple Rule-Based Strategy and Universal Trend-Following Overlay
Portfolio Management Consultants
There is a considerable body of research on relative strength price momentum but much less on absolute momentum, also known as time series momentum. In this paper, we explore the practical side of absolute momentum. We first explore its sole parameter - the formation, or look back, period. We then examine the reward, risk, and correlation characteristics of absolute momentum applied to stocks, bonds, and real assets. We finally apply absolute momentum to a 60/40 stock/bond portfolio and a simple risk parity portfolio. We show that absolute momentum can effectively identify regime change and add significant value as an easy-to-implement, rule-based approach with many potential uses as both a stand-alone program and trend-following overlay.
Number of Pages in PDF File: 33
Keywords: momentum, momentum investing, tactical asset allocation, technical analysis, trading rules
JEL Classification: C10, C22, G10, G11, G14
Date posted: April 4, 2013 ; Last revised: June 13, 2015