Risk-Managed Momentum Strategies

159 Pages Posted: 14 Sep 2019

See all articles by Lars Rickenberg

Lars Rickenberg

University of Mannheim - Department of Risk Theory, Portfolio Management and Insurance

Date Written: September 2, 2019

Abstract

We show that conditional skewness and kurtosis of the momentum strategy are highly time-varying, take extreme values and sometimes may not exist. The high negative skewness and high kurtosis arise since winners’ and losers’ skewness moves in opposite direction whereas kurtosis comoves. Moreover, momentum returns do not follow a random walk. Exploiting these observations we present strategies that manage momentum’s volatility by advanced volatility models in calm periods and downside risk in periods when a momentum crash is likely. Compared to the Realized Volatility managed momentum strategy frequently examined in the literature, our switching strategy exhibits higher returns, significantly reduces left tail risk and provides statistically significant utility gains for mean-variance investors, CRRA investors as well as loss averse investors.

Keywords: Momentum Crashes, Time-Varying Risk, Risk targeting, Downside Risk, Dynamic trading strategies

JEL Classification: C53, G11, G17

Suggested Citation

Rickenberg, Lars, Risk-Managed Momentum Strategies (September 2, 2019). Available at SSRN: https://ssrn.com/abstract=3448995 or http://dx.doi.org/10.2139/ssrn.3448995

Lars Rickenberg (Contact Author)

University of Mannheim - Department of Risk Theory, Portfolio Management and Insurance ( email )

Schloss
Mannheim, 68131
Germany

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