Hedging the time-varying risk exposures of momentum returns

Martin Martens and Arco van Oord

Journal of Empirical Finance, 2014, vol. 28, issue C, 78-89

Abstract: Momentum returns have time-varying exposures to the three Fama and French equity risk factors. In particular factor loadings are higher when the factor returns during the ranking period are higher. In this study we look at momentum returns after hedging these time-varying exposures to the Fama and French factors. We find that specifically taking into account the conditional nature of the time-variation in factor loadings is the best way to hedge. The hedged momentum returns are higher, less risky, more stable over time and vary less over different market conditions. Determining momentum betas based on estimated individual stock betas leads to systematic biases and hence is less effective in hedging.

Keywords: Momentum; Hedging; Conditional factor model (search for similar items in EconPapers)
JEL-codes: G12 G14 (search for similar items in EconPapers)
Date: 2014
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:empfin:v:28:y:2014:i:c:p:78-89

DOI: 10.1016/j.jempfin.2014.05.006

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