Decomposing Momentum: Eliminating its Crash Component

71 Pages Posted: 19 Jul 2021 Last revised: 24 Feb 2022

See all articles by Pascal Büsing

Pascal Büsing

University of Münster - Finance Center

Hannes Mohrschladt

University of Muenster - Finance Center

Susanne Siedhoff

University of Muenster - Finance Center

Date Written: July 15, 2021

Abstract

We propose a purely cross-sectional momentum strategy that avoids crash risk and does not depend on the state of the market. To do so, we simply split up the standard momentum return over months t-12 to t-2 at the highest stock price within this formation period. Both resulting momentum return components predict subsequent returns on a stand-alone basis. However, the long-short returns associated with the first component completely avoid negative skewness as the momentum crashes are driven by the second component's short leg dependence on recent loser stocks. The crash-resilient strategy allows for significant momentum profits even in recent years, avoids the latest Covid-19 momentum crash, and is valid in both the US and international stock markets.

Keywords: Momentum, Momentum crashes, 52-Week high, Cross-section of stock returns

JEL Classification: G11, G12

Suggested Citation

Büsing, Pascal and Mohrschladt, Hannes and Siedhoff, Susanne, Decomposing Momentum: Eliminating its Crash Component (July 15, 2021). Available at SSRN: https://ssrn.com/abstract=3887512 or http://dx.doi.org/10.2139/ssrn.3887512

Pascal Büsing

University of Münster - Finance Center ( email )

Universitätsstraße 14-16
Münster, 48143
Germany

Hannes Mohrschladt (Contact Author)

University of Muenster - Finance Center ( email )

Universitätsstr. 14-16
Muenster, 48143
Germany

HOME PAGE: http://www.wiwi.uni-muenster.de/fcm/en/the-fcm/lsf/team/hannes-mohrschladt

Susanne Siedhoff

University of Muenster - Finance Center ( email )

Universitätsstraße 14-16
Muenster, DE 48143
Germany

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