Risk-Adjusted Cross-Sectional Momentum

23 Pages Posted: 2 Jun 2016 Last revised: 13 Nov 2017

See all articles by Myeong Hyeon Kim

Myeong Hyeon Kim

Seoul National University of Science and Technology

Inro Lee

Korea University - Department of Finance

Date Written: October 18, 2017

Abstract

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

Kim, Myeong Hyeon and Lee, Inro, Risk-Adjusted Cross-Sectional Momentum (October 18, 2017). Available at SSRN: https://ssrn.com/abstract=2786269 or http://dx.doi.org/10.2139/ssrn.2786269

Myeong Hyeon Kim

Seoul National University of Science and Technology ( email )

172 Gongreuing 2-dong, Nowon-gu
Seoul, 139-746
Korea, Republic of (South Korea)

Inro Lee (Contact Author)

Korea University - Department of Finance ( email )

Seoul, 136-701
United States

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