Coskewness and reversal of momentum returns: The US and international evidence

Liang Dong, Yiqing Dai, Tariq Haque, Hung Wan Kot and Takeshi Yamada ()

Journal of Empirical Finance, 2022, vol. 69, issue C, 241-264

Abstract: The winner-minus-loser (WML) momentum strategy carries an inherent downside as its returns have negative coskewness. We propose a coskewness-volatility-managed momentum strategy that reduces the reversal risk of the baseline WML strategy by 61% and that of the volatility-managed momentum strategy (Barosso and Santa-Clara, 2015) by 20% for US stocks. The returns of our strategy generate a slightly positive skewness in contrast with the negative skewness of the WML and volatility-managed strategies. Since the coskewness of momentum portfolio returns predict future returns for up to 12 months, our strategy is effective for momentum portfolios of holding periods longer than one month. Our strategy also mitigates momentum downside risks in major international stock markets such as the UK, Germany, and France.

Keywords: Reversal risk; Coskewness; Momentum (search for similar items in EconPapers)
JEL-codes: G12 G15 (search for similar items in EconPapers)
Date: 2022
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:empfin:v:69:y:2022:i:c:p:241-264

DOI: 10.1016/j.jempfin.2022.10.004

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