Momentum Crash Management

43 Pages Posted: 15 Mar 2015 Last revised: 11 Nov 2015

See all articles by Mahdi Heidari

Mahdi Heidari

Stockholm School of Economics

Date Written: November 5, 2015

Abstract

Momentum is one of the largest and most pervasive market anomalies. However, despite a high mean and Sharpe ratio, momentum suffers from large negative skewness that comes from momentum crash periods. These crashes occur in times of both market stress and market rebound and thus variables that capture these episodes, can be used as momentum predictors. Once momentum prediction has been proved, the predictors can be applied to momentum risk management. I introduce two new momentum predictors and show their predictability in single and multiple regression models in the presence of other predictors that have been used before. I then introduce a new method of momentum risk management that has a lower transaction cost than existing methods, both in terms of turnover and price impact.

Keywords: Momentum, Crashes, Risk Management, Skewness, Transaction Cost

JEL Classification: G11, G12, G14, G17

Suggested Citation

Heidari, Mahdi, Momentum Crash Management (November 5, 2015). Available at SSRN: https://ssrn.com/abstract=2578296 or http://dx.doi.org/10.2139/ssrn.2578296

Mahdi Heidari (Contact Author)

Stockholm School of Economics ( email )

PO Box 6501
Stockholm, 11383
Sweden

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