Details
| Original language | English |
|---|---|
| Pages (from-to) | 1-22 |
| Number of pages | 22 |
| Journal | Journal of empirical finance |
| Volume | 66 |
| Early online date | 28 Dec 2021 |
| Publication status | Published - Mar 2022 |
Abstract
Across markets, momentum is one of the most prominent anomalies and leads to high risk-adjusted returns. On the downside, momentum exhibits huge tail risk as there are short but persistent periods of highly negative returns. Crashes occur in rebounding bear markets, when momentum displays negative betas and momentum volatility is high. Based on ex-ante calculations of these risk measures we construct a crash indicator that effectively isolates momentum crashes from momentum bull markets. An implementable trading strategy that combines both systematic and momentum-specific risk more than doubles the Sharpe ratio of original momentum and outperforms existing risk management strategies over the 1928–2020 period, in 5 and 10-year sub-samples, and an international momentum portfolio.
Keywords
- Asset pricing, Crash indicator, Market anomalies, Momentum
ASJC Scopus subject areas
- Economics, Econometrics and Finance(all)
- Finance
- Economics, Econometrics and Finance(all)
- Economics and Econometrics
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In: Journal of empirical finance, Vol. 66, 03.2022, p. 1-22.
Research output: Contribution to journal › Article › Research › peer review
}
TY - JOUR
T1 - Isolating momentum crashes
AU - Dierkes, Maik
AU - Krupski, Jan
N1 - Funding Information: ? For useful comments we thank an anonymous referee, Lena Draeger, Fabian Hollstein, Kewei Hou, Liang Ma, Michael McDonald, Marcel Prokopczuk, Sebastian Schroen and participants of the 2021 annual meetings of the Financial Management Association (FMA) and Southern Finance Association (SFA). Furthermore, we thank Kenneth French and AQR Capital Management for providing data.
PY - 2022/3
Y1 - 2022/3
N2 - Across markets, momentum is one of the most prominent anomalies and leads to high risk-adjusted returns. On the downside, momentum exhibits huge tail risk as there are short but persistent periods of highly negative returns. Crashes occur in rebounding bear markets, when momentum displays negative betas and momentum volatility is high. Based on ex-ante calculations of these risk measures we construct a crash indicator that effectively isolates momentum crashes from momentum bull markets. An implementable trading strategy that combines both systematic and momentum-specific risk more than doubles the Sharpe ratio of original momentum and outperforms existing risk management strategies over the 1928–2020 period, in 5 and 10-year sub-samples, and an international momentum portfolio.
AB - Across markets, momentum is one of the most prominent anomalies and leads to high risk-adjusted returns. On the downside, momentum exhibits huge tail risk as there are short but persistent periods of highly negative returns. Crashes occur in rebounding bear markets, when momentum displays negative betas and momentum volatility is high. Based on ex-ante calculations of these risk measures we construct a crash indicator that effectively isolates momentum crashes from momentum bull markets. An implementable trading strategy that combines both systematic and momentum-specific risk more than doubles the Sharpe ratio of original momentum and outperforms existing risk management strategies over the 1928–2020 period, in 5 and 10-year sub-samples, and an international momentum portfolio.
KW - Asset pricing
KW - Crash indicator
KW - Market anomalies
KW - Momentum
UR - http://www.scopus.com/inward/record.url?scp=85122511083&partnerID=8YFLogxK
U2 - 10.1016/j.jempfin.2021.12.001
DO - 10.1016/j.jempfin.2021.12.001
M3 - Article
AN - SCOPUS:85122511083
VL - 66
SP - 1
EP - 22
JO - Journal of empirical finance
JF - Journal of empirical finance
SN - 0927-5398
ER -