Momentum Without Crashes

Soros Chitsiripanich, Marc S. Paolella, Pawel Polak and Patrick S. Walker
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Soros Chitsiripanich: University of Zurich
Marc S. Paolella: University of Zurich - Department of Banking and Finance; Swiss Finance Institute
Pawel Polak: Stony Brook University-Department of Applied Mathematics and Statistics
Patrick S. Walker: University of Zurich

No 22-87, Swiss Finance Institute Research Paper Series from Swiss Finance Institute

Abstract: We construct a momentum factor that identifies cross-sectional winners and losers based on a weighting scheme that incorporates all the price data, over the entire lookback period, as opposed to only the first and last price points of the window. The weighting scheme is derived from the fractional-difference filter- a statistical transformation that preserves memory in the data, and has an economic interpretation of coherently combining reversal and momentum patterns in the returns. Our extensive out-of-sample analysis shows that the new fractional momentum strategy not only achieves significantly higher (risk adjusted) returns, but also mitigates the notoriously large drawdowns of the classical momentum and short-term reversal strategies. The performance results are robust with respect to transaction costs and other real world frictions; excess returns are not explained by other asset pricing factors; and they are pervasive across different asset universes and foreign markets.

Keywords: Fractional Differencing; Momentum Factor; Momentum Crashes; Reversal Strategy (search for similar items in EconPapers)
JEL-codes: C32 C53 G11 G17 (search for similar items in EconPapers)
Pages: 53 pages
Date: 2022-11
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:chf:rpseri:rp2287

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