Hedging Momentum

40 Pages Posted: 2 Oct 2019

See all articles by Kai Li

Kai Li

Macquarie Business School, Macquarie University

Le Ma

University of Technology Sydney (UTS)

Date Written: June 24, 2019

Abstract

We assess empirically the intertemporal hedging for assets with momentum (we term it “intertemporal momentum” or IM). Consistent with the dynamic portfolio theory, we show that (1) IM significantly forecasts stock returns at both market level and firm level over long horizons and complements standard myopic momentum (MM); (2) IM strategies produce returns with a slightly lower mean (due to the cost of hedging), much lower volatility, higher skewness (due to the heavy penalty for very negative returns), and hence much higher Sharpe ratio (due to the investment target), comparing with MM; (3) because our IM strategies and static augmented MM strategies manage different risks, a simple combination of them not only generates low volatility as our intertemporal strategies but also high mean as static strategies, more than quadrupling Sharpe ratios of MM; (4) the strong performance of our strategies over long investment horizons reflects the fact that momentum depends heavily on horizons.

Keywords: Momentum, intertemporal hedging, dynamic portfolio strategies

JEL Classification: G11, G12, G17

Suggested Citation

Li, Kai and Ma, Le, Hedging Momentum (June 24, 2019). Available at SSRN: https://ssrn.com/abstract=3407263 or http://dx.doi.org/10.2139/ssrn.3407263

Kai Li (Contact Author)

Macquarie Business School, Macquarie University ( email )

Level 6 4 Eastern Road, Macquarie University
North Ryde NSW 2109
Sydney, NSW 99999
Australia
435473800 (Phone)

Le Ma

University of Technology Sydney (UTS) ( email )

15 Broadway, Ultimo
PO Box 123
Sydney, NSW 2007
Australia

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