A Guide to Survival of Momentum in UK Style Portfolios

Abstract

In this study we estimate the survival time of momentum in six UK style portfolios’ returns in the period October 1980–June 2014. We utilise the Kaplan-Meier estimator, a non-parametric method that measures the probability that momentum will persist beyond the present month. This probability enables us to compute the average momentum survival time for each of the six style portfolios. Discrepancies between these empirical mean survival times to those implied by theoretical models (Random Walk and ARMA (1, 1)) show that there is scope for profiting from momentum trading. We illustrate this by forming long-only, short-only and long-short trading strategies that exploit positive and negative momentum and their average survival time. Our trading strategies show that utilising momentum mean survival time yields considerably higher Sharpe ratios than the naïve buy-and-hold at a feasible level of transaction costs. This finding is most pronounced among the long/short strategies.

Keywords: Momentum survival, Style portfolios, Kaplan-Meier estimator, Trading strategies

JEL Classification: G14, G11