Momentum Crash Management
47 Pages Posted: 20 Aug 2015 Last revised: 15 Sep 2015
Date Written: March 14, 2015
Momentum is the largest and most pervasive market anomaly. However, despite high mean and Sharpe ratio, momentum suffers from large negative skewness that comes from momentum crash periods. These crashes occur in times of market stress and market rebound, thus the variables that capture these episodes, can be used as momentum predictor. I introduce three new momentum predictors and show that changes in momentum volatility have higher predictive power than the other predictors used in previous studies. Once momentum prediction has been proved, the predictors can be employed in momentum risk management. I introduce a new method of momentum risk management that has a lower transaction cost than those methods used in previous studies, both in terms of turnover and price impact.
Keywords: Momentum, crashes, risk management, skewness, transaction cost
JEL Classification: G11, G12, G14, G17
Suggested Citation: Suggested Citation