Optimal Dynamic Momentum Strategies
51 Pages Posted: 14 Mar 2016 Last revised: 17 Jul 2019
Date Written: July 16, 2019
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: Suggested Citation