Momentum Crashes

Kent D. Daniel and Tobias J. Moskowitz
Additional contact information
Kent D. Daniel: Columbia Business School - Finance and Economics; National Bureau of Economic Research (NBER)
Tobias J. Moskowitz: Yale University, Yale SOM; AQR Capital; National Bureau of Economic Research (NBER)

No 13-61, Swiss Finance Institute Research Paper Series from Swiss Finance Institute

Abstract: Across numerous asset classes, momentum strategies have historically generated high Sharpe ratios and strong positive alphas relative to standard asset pricing models. However, the returns to momentum strategies are negatively skewed: they experience infrequent but strong and persistent strings of negative returns. These momentum crashes are partly forecastable. They occur in what we term “panic” states – following market declines and when market volatility is high, and are contemporaneous with market “rebounds.” We show that the low exante expected returns in panic states result from a conditionally high premium attached to the option-like payoffs of past losers. An implementable dynamic momentum strategy based on forecasts of each momentum strategy’s mean and variance generates an unconditional Sharpe ratio approximately double that of the static momentum strategy. Further, we show that momentum returns in panic states are correlated with, but not explained by, volatility risk. These results are robust across eight different markets and asset classes and multiple time periods.

Pages: 57 pages
Date: 2013-12
References: Add references at CitEc
Citations: View citations in EconPapers (4)

Downloads: (external link)
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2371227 (application/pdf)

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:chf:rpseri:rp1361

Access Statistics for this paper

More papers in Swiss Finance Institute Research Paper Series from Swiss Finance Institute Contact information at EDIRC.
Bibliographic data for series maintained by Ridima Mittal ().