Science or scientism? On the momentum illusion

Klaus Grobys ()
Additional contact information
Klaus Grobys: University of Vaasa

Annals of Finance, 2024, vol. 20, issue 4, No 4, 479-519

Abstract: Abstract This study explores the risk of the traditional momentum strategy in terms of its realized variance using various data frequencies. It is shown that momentum risk is infinite regardless of the data frequency, implying that (a) t-statistics for this strategy do not exist, (b) correlation-based metrics such as Sharpe ratios do not exist either, and (c) the momentum premium is not observable in reality. It is further shown that the time-honored lognormal distribution is unable to accurately model extreme events observed at various variance data frequencies. Finally, it is shown that the well-known effect of time aggregation does not work for this investment vehicle. Hence, the study is forced to conclude that momentum stories have no valid foundation for their claims.

Keywords: Asset pricing; Financial risk; Momentum; Power laws; Realized variance; Risk; Time aggregation (search for similar items in EconPapers)
JEL-codes: C14 C22 G10 G14 G17 (search for similar items in EconPapers)
Date: 2024
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
http://link.springer.com/10.1007/s10436-024-00446-5 Abstract (text/html)
Access to full text is restricted to subscribers.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:kap:annfin:v:20:y:2024:i:4:d:10.1007_s10436-024-00446-5

Ordering information: This journal article can be ordered from
http://www.springer.com/finance/journal/10436/PS2

DOI: 10.1007/s10436-024-00446-5

Access Statistics for this article

Annals of Finance is currently edited by Anne Villamil

More articles in Annals of Finance from Springer
Bibliographic data for series maintained by Sonal Shukla () and Springer Nature Abstracting and Indexing ().