Momentum and reversal strategies with low uncertainty

Wenhao Wang, Qingyi Zhang, Pengda An and Feifei Cai

Finance Research Letters, 2024, vol. 68, issue C

Abstract: We propose augmented momentum and reversal trading strategies that incorporate considerations of market entry timing. Market entry timing is determined by two criteria: (1) low uncertainty of the model used to forecast trading return, and (2) a positive forecasted return. Utilizing daily data from the Chinese stock market, we demonstrate that while canonical momentum and reversal trading strategies typically yield negative returns and skewness, our augmented strategies consistently exhibit positive returns and skewness. Additionally, we show that implementation of the two criteria does not significantly diminish trading opportunities, with identified market entry days evenly distributed throughout the sample period.

Keywords: Momentum trading; Reversal trading; Model (un)certainty; Market entry timing (search for similar items in EconPapers)
JEL-codes: G11 G17 (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:eee:finlet:v:68:y:2024:i:c:s1544612324010006

DOI: 10.1016/j.frl.2024.105970

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