Partial Moment Momentum
50 Pages Posted: 17 Aug 2017 Last revised: 7 Dec 2017
Date Written: December 7, 2017
Momentum profits benefit from persistent trends of the market, which can be predicted by market volatility. However, such strategies are unable to distinguish between upside and downside risk. We propose partial moments-based momentum trading strategies and find that they outperform plain momentum and volatility-scaled momentum strategies. Our best performing partial moments-based strategy shows an annualized Sharpe ratio of 1.62 during the period of 2000–2016 against a Sharpe ratio of 0.15 from a plain momentum strategy. We suggest that this greater profitability is due to the unexploited investment opportunities that arise from being able to distinguish between good and bad risk. We find strong outperformance for seven out of eight partial moments-based strategies during states of market downturn. The outperformance is robust across different time periods.
Keywords: Downside risk, Momentum, Partial moments, Portfolio performance
JEL Classification: G11, G12, G17
Suggested Citation: Suggested Citation