Taming Momentum Crashes
67 Pages Posted: 9 Aug 2022 Last revised: 17 Oct 2022
Date Written: August 4, 2022
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: Suggested Citation