Risk-Managed Momentum Strategies
177 Pages Posted: 14 Sep 2019 Last revised: 30 Jun 2020
Date Written: September 2, 2019
We show that conditional skewness and kurtosis of the momentum strategy are highly time-varying and sometimes take extreme values or may even not exist. The high negative skewness and high kurtosis arise since the winners' and losers' skewness moves in opposite directions, whereas the kurtosis comoves. Moreover, momentum returns do not follow a random walk. Based on these observations, we present strategies that manage momentum's volatility by advanced volatility models in calm periods and downside risk models in periods when a momentum crash is likely. Compared to the Realized Volatility managed momentum strategy, which is frequently examined in the literature, our switching strategy exhibits higher returns, significantly reduces left tail risk and provides economically high and 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: Suggested Citation