Optimal Dynamic Momentum Strategies

Operations Research

69 Pages Posted: 14 Mar 2016 Last revised: 29 Nov 2021

See all articles by Kai Li

Kai Li

Macquarie Business School, Macquarie University

Jun Liu

University of California, San Diego (UCSD) - Rady School of Management

Date Written: November 26, 2021

Abstract

We explicitly solve for the optimal dynamic trading strategy between a riskless asset and a risky asset with momentum. The optimal portfolio weight depends not only on the momentum, as in Merton’s (1971) framework, but also on the historical price path; this contrasts with Merton. Due to their path dependence, optimal portfolio weights have a wide distribution for a given level of momentum; for example, investors may short the risky asset if it has rebound price paths but leverage if it has hump-shaped price paths. This effect tends to be the most significant after large price swings. Path dependence is solved with explicit formulas and presented with heuristic statistics.

Keywords: momentum, optimal trading strategy, path dependence.

JEL Classification: C32, G11

Suggested Citation

Li, Kai and Liu, Jun, Optimal Dynamic Momentum Strategies (November 26, 2021). Operations Research, Available at SSRN: https://ssrn.com/abstract=2746561 or http://dx.doi.org/10.2139/ssrn.2746561

Kai Li (Contact Author)

Macquarie Business School, Macquarie University ( email )

Level 6 4 Eastern Road, Macquarie University
North Ryde NSW 2109
Sydney, NSW 99999
Australia
435473800 (Phone)

Jun Liu

University of California, San Diego (UCSD) - Rady School of Management ( email )

9500 Gilman Drive
Rady School of Management
La Jolla, CA 92093
United States
858.534.2022 (Phone)
5858.534.0745 (Fax)

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
474
Abstract Views
2,181
rank
77,539
PlumX Metrics