Optimal Dynamic Momentum Strategies

51 Pages Posted: 14 Mar 2016 Last revised: 17 Jul 2019

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: July 16, 2019

Abstract

We explicitly solve for the optimal dynamic strategy between a riskless asset and a risky asset with momentum. The optimal portfolio weight depends not only on momentum that characterizes the expected return as in Merton (1971) framework, but also on the historical price path, unlike in Merton. For a rebound path with positive momentum, the investor will short the asset, effectively home-making an asset with return reversal. The optimal strategy outperforms the strategies ignoring the path dependence, especially after extreme market periods.

Keywords: momentum, optimal trading strategy, path dependence.

JEL Classification: C32, G11

Suggested Citation

Li, Kai and Liu, Jun, Optimal Dynamic Momentum Strategies (July 16, 2019). 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)

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