NBER Working Paper No. 20439
Issued in August 2014
NBER Program(s):
Issued in August 2014
NBER Program(s):
Here's an ungated version via the Social Science Research Network (57 page PDF)Despite their strong positive average returns across numerous asset classes, momentum strategies can experience infrequent and persistent strings of negative returns. These momentum crashes are partly forecastable. They occur in “panic” states – following market declines and when market volatility is high – and are contemporaneous with market rebounds. We show that the low ex-ante expected returns in panic states are consistent with a conditionally high premium attached to the option-like payoffs of past losers. An implementable dynamic momentum strategy based on forecasts of momentum’s mean and variance approximately doubles the alpha and Sharpe Ratio of a static momentum strategy, and is not explained by other factors. These results are robust across multiple time periods, international equity markets, and other asset classes.
And an earlier version at Columbia (54 page PDF)
