Volatility Weighting Applied to Momentum Strategies

37 Pages Posted: 29 Apr 2015 Last revised: 29 Jul 2016

Johannes Paulus Du Plessis

Independent

Winfried G. Hallerbach

Robeco Asset Management, Quantitative Investment Research

Date Written: April 27, 2015

Abstract

We consider two forms of volatility weighting (own volatility and underlying asset volatility) applied to cross-sectional and time-series momentum strategies. We present some simple theoretical results for the Sharpe ratios of weighted strategies and show empirical results for momentum strategies applied to US industry portfolios. We find that both the timing effect and the stabilizing effect of volatility weighting are relevant for the improvement in Sharpe ratios. We also introduce a dispersion weighting scheme which treats cross-sectional dispersion as (partially) forecastable volatility. Although dispersion weighting improves the Sharpe ratio, it seems to be less effective than volatility weighting.

Keywords: momentum, trend following, volatility weighting, cross-section dispersion

JEL Classification: C58, G10, G11

Suggested Citation

Du Plessis, Johannes Paulus and Hallerbach, Winfried G., Volatility Weighting Applied to Momentum Strategies (April 27, 2015). Journal of Alternative Investments, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2599635 or http://dx.doi.org/10.2139/ssrn.2599635

Johannes Paulus Du Plessis

Independent ( email )

No Address Available

Winfried George Hallerbach (Contact Author)

Robeco Asset Management, Quantitative Investment Research ( email )

Weena 850
Rotterdam, 3014 DA
Netherlands
+31102242316 (Phone)

HOME PAGE: http://www.robeco.com/quant

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