TY - JOUR
T1 - Momentum has its moments
AU - Barroso, Pedro
AU - Santa-Clara, Pedro
N1 - Funding Information:
We thank an anonymous referee, Abhay Abhyankar, Eduardo Schwartz, David Lando, Denis Chaves, James Sefton, José Filipe Corrêa Guedes, Kent Daniel, Kristian Miltersen, Lasse Pederson, Nigel Barradale, Pasquale Della Corte, Robert Kosowski, Soeren Hvidkjaer, and numerous seminar participants at BI Norwegian Business School, Copenhagen Business School, CUNEF (Colegio Universitario de Estudios Financieros), Imperial College London, Lubrafin (Luso-Brazilian Finance Meeting), Nova School of Business and Economics, National University of Singapore, Rotterdam School of Management, Universidad Carlos III de Madrid, University of Exeter, and University of New South Wales for their helpful comments and suggestions. A previous version of this paper circulated with the title “Managing the Risk of Momentum.” Pedro Santa-Clara is supported by a grant from the Fundação para a Ciência e Tecnologia ( PTDC/EGE-GES/101414/2008 ).
Publisher Copyright:
© 2014 Elsevier B.V.
PY - 2015/4/1
Y1 - 2015/4/1
N2 - Compared with the market, value, or size factors, momentum has offered investors the highest Sharpe ratio. However, momentum has also had the worst crashes, making the strategy unappealing to investors who dislike negative skewness and kurtosis. We find that the risk of momentum is highly variable over time and predictable. Managing this risk virtually eliminates crashes and nearly doubles the Sharpe ratio of the momentum strategy. Risk-managed momentum is a much greater puzzle than the original version.
AB - Compared with the market, value, or size factors, momentum has offered investors the highest Sharpe ratio. However, momentum has also had the worst crashes, making the strategy unappealing to investors who dislike negative skewness and kurtosis. We find that the risk of momentum is highly variable over time and predictable. Managing this risk virtually eliminates crashes and nearly doubles the Sharpe ratio of the momentum strategy. Risk-managed momentum is a much greater puzzle than the original version.
KW - Anomalies
KW - Momentum
KW - Time-varying risk
KW - Transaction costs of momentum
UR - http://www.scopus.com/inward/record.url?scp=84925399085&partnerID=8YFLogxK
U2 - 10.1016/j.jfineco.2014.11.010
DO - 10.1016/j.jfineco.2014.11.010
M3 - Article
SN - 0304-405X
VL - 116
SP - 111
EP - 120
JO - Journal of Financial Economics
JF - Journal of Financial Economics
IS - 1
ER -