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Trend Following: Equity and Bond Crisis Alpha

19 Pages Posted: 30 Aug 2016  

Date Written: August 30, 2016

Abstract

We study time-series momentum (trend-following) strategies in bonds, commodities, currencies and equity indices between 1960 and 2015. We find that momentum strategies performed consistently both before and after 1985, periods which were marked by strong bear and bull markets in bonds respectively. We document a number of important risk properties. First, that returns are positively skewed, which we argue is intuitive by drawing a parallel between momentum strategies and a long option straddle strategy. Second, performance was particularly strong in the worst equity and bond market environments, giving credence to the claim that trend-following can provide equity and bond crisis alpha. Putting restrictions on the strategy to prevent it being long equities or long bonds has the potential to further enhance the crisis alpha, but reduces the average return. Finally, we examine how performance has varied across momentum strategies based on returns with different lags and applied to different asset classes.

Keywords: trend following, momentum, crisis alpha, skewness

JEL Classification: E32, E44, G11, G12, G14

Suggested Citation

Hamill, Carl and Rattray, Sandy and Van Hemert, Otto, Trend Following: Equity and Bond Crisis Alpha (August 30, 2016). Available at SSRN: https://ssrn.com/abstract=2831926 or http://dx.doi.org/10.2139/ssrn.2831926

Carl Hamill

Man AHL ( email )

Riverbank House
2 Swan Lane
London, EC4R 3AD
United Kingdom

Sandy Rattray

Man AHL ( email )

Riverbank House
2 Swan Lane
London, EC4R 3AD
United Kingdom

Otto Van Hemert (Contact Author)

Man AHL ( email )

Riverbank House
2 Swan Lane
London, EC4R 3AD
United Kingdom

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