Time Series Momentum and Volatility Scaling
Posted: 2 Jun 2016
Date Written: May 31, 2016
Moskowitz, Ooi, and Pedersen (2012) show that time series momentum delivers a large and significant alpha for a diversified portfolio of international futures contracts. We find that their results are largely driven by volatility-scaling returns (or the so-called risk parity approach to asset allocation) rather than by time series momentum. Without scaling by volatility, time series momentum and a buy-and-hold strategy offer similar cumulative returns, and their alphas are not significantly different. This similarity holds for most sectors and for a combined portfolio of futures contracts. Cross-sectional momentum also offers a higher (similar) alpha than unscaled (scaled) time series momentum.
Keywords: momentum, futures pricing, international asset allocation
JEL Classification: G12, G13, G14
Suggested Citation: Suggested Citation