Revisit the Momentum Strategy

Abstract

Examining the properties of stock returns has long been a central topic in finance. One of the prevalent properties among traders is the momentum strategy, which is also known as a relative strength strategy. The momentum effect has been confirmed　not only in many financial assets but also in the financial markets of several countries. However, the investment portfolio’s performance of the momentum strategy often faces a large drawdown risk when the market rebounds. This phenomenon is especially profound during the period of the Credit Crash in 2008. The purpose of this study is to propose two modifications to improve the momentum strategy from the perspective of the implied price risk and the residual analysis. The empirical results demonstrate that our modified strategy can not only achieve significant improvement on the overall performance but also substantially reduce the drastic losses suffered from the 2008 global recession. This work is a joint work with Hwai-Chung Ho in Institute of Statistical Science, Academia Sinica and Department of Finance, National Taiwan University. Keyword: Momentum crash; Price risk; Residual analysis?