Dynamic Momentum and Contrarian Trading

28 Pages Posted: 30 Mar 2017  

Victoria Dobrynskaya

National Research University Higher School of Economics

Multiple version iconThere are 2 versions of this paper

Date Written: March 15, 2017

Abstract

High momentum returns cannot be explained by risk factors, but they are negatively skewed and subject to occasional severe crashes. I explore the timing of momentum crashes and show that momentum strategies tend to crash in 1-3 months after the local stock market plunge. Next, I propose a simple dynamic trading strategy which coincides with the standard momentum strategy in calm times, but switches to the opposite contrarian strategy in one month after a market crash and keeps the contrarian position for three months, after which it reverts back to the momentum position. The dynamic momentum strategy turns all major momentum crashes into gains and yields average return, which is about 1.5 times as high as the standard momentum return. The dynamic momentum returns are positively skewed and not exposed to risk factors, have high Sharpe ratio and alpha, persist in different time periods and geographical markets around the Globe.

Keywords: momentum, downside risk, crash risk, trading strategy

JEL Classification: G12, G14, G15

Suggested Citation

Dobrynskaya, Victoria, Dynamic Momentum and Contrarian Trading (March 15, 2017). Available at SSRN: https://ssrn.com/abstract=2942641 or http://dx.doi.org/10.2139/ssrn.2942641

Victoria Dobrynskaya (Contact Author)

National Research University Higher School of Economics ( email )

26, Shabolovka st.
Moscow, 119017
Russia

HOME PAGE: http://www.hse.ru

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