Dynamic Momentum and Contrarian Trading

33 Pages Posted: 25 Sep 2017

Multiple version iconThere are 2 versions of this paper

Date Written: September 22, 2017


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 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 an 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, Contrarian, Downside Risk, Crash Risk, Trading Strategy

JEL Classification: G12, G14, G15

Suggested Citation

Dobrynskaya, Victoria, Dynamic Momentum and Contrarian Trading (September 22, 2017). Higher School of Economics Research Paper No. WP BRP 61/FE/2017, Available at SSRN: https://ssrn.com/abstract=3041227 or http://dx.doi.org/10.2139/ssrn.3041227

Victoria Dobrynskaya (Contact Author)

affiliation not provided to SSRN

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