Does Momentum Trading Generate Extra Downside Risk?

Victoria Dobrynskaya

Quarterly Journal of Finance (QJF), 2022, vol. 12, issue 02, 1-32

Abstract: Momentum strategies tend to provide low returns during market crashes, and they crash themselves when the market rebounds after significant crashes. This is reflected by positive downside market betas and negative upside market betas of zero-cost momentum portfolios. Such asymmetry in upside and downside risks is unfavorable for investors and requires a risk premium. It arises mechanically because of momentum portfolio rebalancing based on trailing asset performance. The asymmetry in upside and downside risks is a robust unifying feature of momentum portfolios in various geographical and asset markets. The momentum premium can be rationalized within a standard asset-pricing framework, where upside and downside risks are priced differently.

Keywords: Momentum premium; momentum crashes; downside risk; downside beta; upside risk; upside beta; downside-risk CAPM (search for similar items in EconPapers)
JEL-codes: G12 G14 G15 (search for similar items in EconPapers)
Date: 2022
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DOI: 10.1142/S201013922250001X

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