Risk Adjusted Momentum Strategies: A Comparison between Constant and Dynamic Volatility Scaling Approaches

Abstract

We compare the performance of two volatility scaling methods in momentum strategies: (i) the constant volatility scaling approach of Barroso and Santa-Clara (2015), and (ii) the dynamic volatility scaling method of Daniel and Moskowitz (2016). We perform momentum strategies based on these two approaches in an asset pool consisting of 55 global liquid futures contracts, and further compare these results to the time series momentum and buy-and-hold strategies. We find that the momentum strategy based on the constant volatility scaling method is the most efficient approach with an annual return of 15.3%.

Keywords: Cross-sectional momentum, Time series momentum, Momentum crashes, Volatility scaling

JEL Classification: G11, G12, G13