Does Momentum Trading Generate Extra Downside Risk?

57 Pages Posted: 22 Feb 2014 Last revised: 7 Jul 2020

See all articles by Victoria Dobrynskaya

Victoria Dobrynskaya

National Research University Higher School of Economics

Multiple version iconThere are 2 versions of this paper

Date Written: June 29, 2020

Abstract

I provide a novel risk-based explanation for the profitability of momentum strategies. I show that past winners have higher extra downside risk and lower extra upside risk (on top of the market-beta risk) than past losers. As a result, the winner-minus-loser momentum portfolios are exposed to extra downside risk, but hedge against the upside risk, and this is compensated by a risk premium. Moreover, I show that this is not an inherent feature of the stocks in the winner and loser portfolios, but rather a result of portfolio rebalancing. The downside risk is orthogonal to the momentum risk and adds a risk premium to momentum returns. The downside risk is a robust unifying feature of momentum returns in various geographical and asset markets around the globe.

Keywords: momentum, downside risk, downside beta, upside risk, upside beta, Downside-Risk CAPM

JEL Classification: G12, G14, G15

Suggested Citation

Dobrynskaya, Victoria, Does Momentum Trading Generate Extra Downside Risk? (June 29, 2020). Available at SSRN: https://ssrn.com/abstract=2399359 or http://dx.doi.org/10.2139/ssrn.2399359

Victoria Dobrynskaya (Contact Author)

National Research University Higher School of Economics ( email )

26, Shabolovka st.
Moscow, 119017
Russia

HOME PAGE: http://www.hse.ru

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