Taming Momentum Crashes

67 Pages Posted: 9 Aug 2022 Last revised: 17 Oct 2022

See all articles by Daniele Bianchi

Daniele Bianchi

School of Economics and Finance, Queen Mary University of London

Andrea De Polis

University of Warwick - Warwick Business School

Ivan Petrella

University of Warwick - Finance Group; University of Warwick - Warwick Business School; University of Warwick; Centre for Economic Policy Research (CEPR)

Date Written: August 4, 2022

Abstract

The returns on US equity momentum exhibit a time-varying conditional skewness which deepens during the so-called "momentum crashes''. We show that this has first-order implications for managing the risk associated with momentum investing: a skewness-adjusted momentum strategy consistently outperforms existing constant and dynamic volatility-managed momentum portfolios. The importance of conditional skewness for managing momentum risk lies in the fact that the strategy risk-return trade-off reflects a non-linear interaction between both conditional volatility and skewness. Yet, the dynamics of momentum returns' skewness cannot be reconciled by a state-dependent exposure to aggregate market risk.

Keywords: Momentum, time-varying skewness, managed portfolios, asset pricing, score driven models.

JEL Classification: G11, G12, G17, C23

Suggested Citation

Bianchi, Daniele and De Polis, Andrea and Petrella, Ivan and Petrella, Ivan and Petrella, Ivan, Taming Momentum Crashes (August 4, 2022). Available at SSRN: https://ssrn.com/abstract=4182040 or http://dx.doi.org/10.2139/ssrn.4182040

Daniele Bianchi (Contact Author)

School of Economics and Finance, Queen Mary University of London ( email )

Mile End Road
London, London E1 4NS
United Kingdom

HOME PAGE: http://whitesphd.com

Andrea De Polis

University of Warwick - Warwick Business School ( email )

Coventry CV4 7AL
United Kingdom

Ivan Petrella

University of Warwick ( email )

Gibbet Hill Rd.
Coventry, West Midlands CV4 8UW
United Kingdom

University of Warwick - Finance Group ( email )

Gibbet Hill Rd
Coventry, CV4 7AL
Great Britain

University of Warwick - Warwick Business School ( email )

Coventry CV4 7AL
United Kingdom

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

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