Optimal Dynamic Momentum Strategies

Kai Li and Jun Liu ()
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Jun Liu: Rady School of Management, University of California San Diego, La Jolla, California 92093

Operations Research, 2022, vol. 70, issue 4, 2054-2068

Abstract: We explicitly solve for the optimal dynamic trading strategy between a riskless asset and a risky asset with momentum. The optimal portfolio weight depends not only on the momentum, as in Merton’s framework, but also on the historical price path; this contrasts with Merton. Because of their path dependence, optimal portfolio weights have a wide distribution for a given level of momentum; for example, investors may short the risky asset if it has rebound price paths but leverage if it has hump-shaped price paths. This effect tends to be the most significant after large price swings. Path dependence is solved with explicit formulas and presented with heuristic statistics.

Keywords: Financial Engineering; momentum; optimal portfolio; path dependence (search for similar items in EconPapers)
Date: 2022
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Persistent link: https://EconPapers.repec.org/RePEc:inm:oropre:v:70:y:2022:i:4:p:2054-2068

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