Momentum Turning Points
68 Pages Posted: 5 Dec 2019 Last revised: 10 Dec 2019
Date Written: December 9, 2019
Turning points are the Achilles' heel of time-series momentum portfolios. Slow signals fail to react quickly to changes in trend while fast signals are often false alarms. We examine theoretically and empirically how momentum portfolios of various intermediate speeds, formed by blending slow and fast strategies, cope with turning points. Our model predicts an optimal dynamic speed selection strategy. We apply this strategy across domestic and international equity markets and document efficient out-of-sample performance. We also propose a novel decomposition of momentum strategy alpha, highlighting the role of volatility timing.
Keywords: time-series momentum, volatility timing, market timing, asset pricing, trend following, turning points, momentum speed, mean reversion, behavioral finance
JEL Classification: G12, G13
Suggested Citation: Suggested Citation