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Momentum Crashes

57 Pages Posted: 24 Dec 2013  

Kent D. Daniel

Columbia Business School - Finance and Economics; National Bureau of Economic Research (NBER)

Tobias J. Moskowitz

Yale University, Yale SOM; AQR Capital; National Bureau of Economic Research (NBER)

Multiple version iconThere are 5 versions of this paper

Date Written: September 30, 2013

Abstract

Across numerous asset classes, momentum strategies have historically generated high Sharpe ratios and strong positive alphas relative to standard asset pricing models. However, the returns to momentum strategies are negatively skewed: they experience infrequent but strong and persistent strings of negative returns. These momentum crashes are partly forecastable. They occur in what we term “panic” states – following market declines and when market volatility is high, and are contemporaneous with market “rebounds.” We show that the low exante expected returns in panic states result from a conditionally high premium attached to the option-like payoffs of past losers. An implementable dynamic momentum strategy based on forecasts of each momentum strategy’s mean and variance generates an unconditional Sharpe ratio approximately double that of the static momentum strategy. Further, we show that momentum returns in panic states are correlated with, but not explained by, volatility risk. These results are robust across eight different markets and asset classes and multiple time periods.

Suggested Citation

Daniel, Kent D. and Moskowitz, Tobias J., Momentum Crashes (September 30, 2013). Swiss Finance Institute Research Paper No. 13-61; Columbia Business School Research Paper No. 14-6; Fama-Miller Working Paper. Available at SSRN: https://ssrn.com/abstract=2371227 or http://dx.doi.org/10.2139/ssrn.2371227

Kent D. Daniel (Contact Author)

Columbia Business School - Finance and Economics ( email )

3022 Broadway
New York, NY 10027
United States
212-854-4679 (Phone)
212-854-4679 (Fax)

HOME PAGE: http://www.columbia.edu/~kd2371/

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Tobias J. Moskowitz

Yale University, Yale SOM ( email )

New Haven, CT 06520
United States

HOME PAGE: http://som.yale.edu/tobias-j-moskowitz

AQR Capital ( email )

Greenwich, CT
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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