The total return to Momentum was impressive for many decades. It's a simple strategy, basically going long past winners and short the losers, hoping they continue to win and lose. Interestingly, the past returns should go only up to the prior month, because there's slight mean-reversion at the one-month horizon, so most people use the returns from months t-12 through t-1. This highlights the non-fractal nature of stock returns, in that there's momentum in the data from 3-18 months, but mean-reversion at the shorter and longer frequencies.Even after discovered by Jegadeesh and Titman in 1992, it seemed to work for another 8 years. Since 2000, however, it hasn't worked (see a decent paper on that here). Using Ken French's replication of this strategy, we see the total return pattern above. Note that while from 1932 through 1943 it stagnated, it seemed Madoff-like in its ascendance from the end of WW2 through 2000.
The big drawdowns in the momentum strategy occurred in the big stock rebounds of July-Aug 1932, and March-Sep 2009. These moves would generate losses of over 50%, which since it generated an 8% annual return, this would probably eliminate any particular portfolio manager--such losses are usually lethal....MORE
Thursday, November 10, 2011
Posted by climateer at 5:52 AM