Momentum Crashes

52 Pages Posted: 2 Sep 2014 Last revised: 6 Nov 2024

See all articles by Kent D. Daniel

Kent D. Daniel

Columbia University - Columbia Business School, Finance; National Bureau of Economic Research (NBER)

Tobias J. Moskowitz

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

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Date Written: August 2014

Abstract

Despite their strong positive average returns across numerous asset classes, momentum strategies can experience infrequent and persistent strings of negative returns. These momentum crashes are partly forecastable. They occur in "panic" states - following market declines and when market volatility is high - and are contemporaneous with market rebounds. We show that the low ex-ante expected returns in panic states are consistent with a conditionally high premium attached to the option-like payoffs of past losers. An implementable dynamic momentum strategy based on forecasts of momentum's mean and variance approximately doubles the alpha and Sharpe Ratio of a static momentum strategy, and is not explained by other factors. These results are robust across multiple time periods, international equity markets, and other asset classes.

Suggested Citation

Daniel, Kent D. and Moskowitz, Tobias J. and Moskowitz, Tobias J., Momentum Crashes (August 2014). NBER Working Paper No. w20439, Available at SSRN: https://ssrn.com/abstract=2490306

Kent D. Daniel (Contact Author)

Columbia University - Columbia Business School, Finance ( email )

National Bureau of Economic Research (NBER)

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Tobias J. Moskowitz

Yale University, Yale SOM ( email )

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

AQR Capital ( email )

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