Dynamic Momentum and Contrarian Trading

Victoria Dobrynskaya

HSE Working papers from National Research University Higher School of Economics

Abstract: High momentum returns cannot be explained by risk factors, but they are negatively skewed and subject to occasional severe crashes. I explore the timing of momentum crashes and show that momentum strategies tend to crash in 1-3 months after the local stock market plunge. Next, I propose a simple dynamic trading strategy which coincides with the standard momentum strategy in calm times, but switches to the opposite contrarian strategy after a market crash and keeps the contrarian position for three months, after which it reverts back to the momentum position. The dynamic momentum strategy turns all major momentum crashes into gains and yields an average return, which is about 1.5 times as high as the standard momentum return. The dynamic momentum returns are positively skewed and not exposed to risk factors, have high Sharpe ratio and alpha, persist in different time periods and geographical markets around the globe

Keywords: momentum; contrarian; downside risk; crash risk; trading strategy (search for similar items in EconPapers)
JEL-codes: G12 G14 G15 (search for similar items in EconPapers)
Pages: 33 pages
Date: 2017
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Published in WP BRP Series: Financial Economics / FE, September 2017, pages - 33

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Persistent link: https://EconPapers.repec.org/RePEc:hig:wpaper:61/fe/2017

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