Risk-Adjusted Cross-Sectional Momentum
23 Pages Posted: 2 Jun 2016 Last revised: 13 Nov 2017
Date Written: October 18, 2017
This study proposes a new ranking criterion for constructing momentum portfolios, namely, risk-adjusted cross-sectional momentum. We propose the combination of traditional cross-sectional momentum strategies with diﬀerent volatility timing strategies in the form of the Sharpe ratio. Then, we show that the traditional momentum trading is inferior to the risk-adjusted cross-sectional momentum strategy and employing the conditioning information can be beneﬁcial with 3% annual returns. This ﬁnding is particularly pronounced in the presence of momentum crashes during the global ﬁnancial crisis. In addition, we highlight the role of penny stocks and ﬁnd that they signiﬁcantly aﬀect momentum crashes. Our ﬁndings have important implications for market practitioners.
Keywords: Momentum Strategies, Risk-Return Criteria, Volatility Timing
JEL Classification: G11, G12, G14
Suggested Citation: Suggested Citation