Momentum Without Crashes

53 Pages Posted: 18 Nov 2022 Last revised: 23 Nov 2022

See all articles by Soros Chitsiripanich

Soros Chitsiripanich

University of Zurich - Department of Banking and Finance

Marc S. Paolella

University of Zurich - Department of Banking and Finance; Swiss Finance Institute

Pawel Polak

Stony Brook University-Department of Applied Mathematics and Statistics; Institute for Advanced Computational Science

Patrick S. Walker

University of Zurich, Department of Banking and Finance; OLZ AG

Date Written: November 14, 2022

Abstract

We construct a momentum factor that identifies cross-sectional winners and losers based on a weighting scheme that incorporates all the price data, over the entire lookback period, as opposed to only the first and last price points of the window. The weighting scheme is derived from the fractional-difference filter- a statistical transformation that preserves memory in the data, and has an economic interpretation of coherently combining reversal and momentum patterns in the returns. Our extensive out-of-sample analysis shows that the new fractional momentum strategy not only achieves significantly higher (risk adjusted) returns, but also mitigates the notoriously large drawdowns of the classical momentum and short-term reversal strategies. The performance results are robust with respect to transaction costs and other real world frictions; excess returns are not explained by other asset pricing factors; and they are pervasive across different asset universes and foreign markets.

Keywords: Fractional Differencing, Momentum Factor, Momentum Crashes, Reversal Strategy

JEL Classification: C32, C53, G11, G17.

Suggested Citation

Chitsiripanich, Soros and Paolella, Marc S. and Polak, Pawel and Walker, Patrick S., Momentum Without Crashes (November 14, 2022). Swiss Finance Institute Research Paper No. 22-87, Available at SSRN: https://ssrn.com/abstract=4280465 or http://dx.doi.org/10.2139/ssrn.4280465

Soros Chitsiripanich

University of Zurich - Department of Banking and Finance ( email )

Plattenstrasse 14
Zürich, 8032
Switzerland

Marc S. Paolella

University of Zurich - Department of Banking and Finance

Plattenstr. 14
Zürich, 8032
Switzerland

Swiss Finance Institute

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4
Switzerland

Pawel Polak (Contact Author)

Stony Brook University-Department of Applied Mathematics and Statistics ( email )

Stony Brook University
Stony Brook, NY 11794
United States

Institute for Advanced Computational Science ( email )

100 Nicolls Rd
Mailstop 5250
Stony Brook, NY 11794
United States

HOME PAGE: http://https://sites.google.com/view/pawelpolak/

Patrick S. Walker

University of Zurich, Department of Banking and Finance ( email )

Plattenstrasse 14
Zürich, CH-8032
Switzerland

HOME PAGE: http://www.bf.uzh.ch/

OLZ AG ( email )

Gessnerallee 38
Zurich, Zurich 8001
Switzerland

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