Optimization study of momentum investment strategies under asymmetric power-law distribution of return rate

Wu Xu (), Wang Kun (), Zhang Linlin and Peng Chong
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Wu Xu: School of Business, Post-Doctoral Research Station of Management Science and Engineering, Chengdu University of Technology, Chengdu, China
Wang Kun: School of Business, Chengdu University of Technology, Chengdu, China
Zhang Linlin: School of Business, Post-Doctoral Research Station of Management Science and Engineering, Chengdu University of Technology, Chengdu, China
Peng Chong: School of Business, Post-Doctoral Research Station of Management Science and Engineering, Chengdu University of Technology, Chengdu, China

Studies in Nonlinear Dynamics & Econometrics, 2023, vol. 27, issue 5, 687-704

Abstract: In the context that the tails of security returns obey an asymmetric power-law distribution, this paper constructs two fractal statistical measures based on fractal theory: fractal expectation and fractal variance. Subsequently, a new momentum strategy is constructed by introducing the fractal measures into the momentum strategy as measures of returns and risks to optimize the selection criterion. Finally, the empirical results show that the new momentum strategy outperforms the traditional momentum strategy and the risk-adjusted momentum strategy, confirming the effectiveness of fractal expectation and fractal variance.

Keywords: asymmetric power-law distribution; fractal expectation; fractal variance; momentum strategy; risk-adjusted momentum strategy (search for similar items in EconPapers)
Date: 2023
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DOI: 10.1515/snde-2022-0020

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