Time series momentum and macroeconomic risk

Mark C. Hutchinson and John O'Brien

International Review of Financial Analysis, 2020, vol. 69, issue C

Abstract: The time series momentum strategy, previously known as trend following, has been shown to deliver consistent profitability over a long time horizon in futures markets. Funds pursuing this strategy are now a component of many institutional portfolios, due to the expectation of positive returns in equity bear markets. However, the return drivers of the strategy and its performance in other economic conditions are less well understood. We find evidence that the returns to the strategy are connected to the business cycle. Returns are positive in both recessions and expansions, but profitability is higher in expansions. Decomposing asset prices into factor related and idiosyncratic components, we associate a significant portion of returns with exposure to time varying economic factors, consistent with rational asset pricing theories having a role in explaining the profitability of the strategy.

Keywords: Time series momentum; Macroeconomic risk; CTA (search for similar items in EconPapers)
JEL-codes: G10 G19 (search for similar items in EconPapers)
Date: 2020
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Citations: View citations in EconPapers (5)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:finana:v:69:y:2020:i:c:s1057521920301137

DOI: 10.1016/j.irfa.2020.101469

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