Smoothing Out Momentum and Reversal

Soros Chitsiripanich, Marc S. Paolella, Pawel Polak and Patrick S. Walker
Additional contact information
Soros Chitsiripanich: University of Zurich - Department Finance
Marc S. Paolella: University of Zurich - Department Finance; Swiss Finance Institute
Pawel Polak: Stony Brook University-Department of Applied Mathematics and Statistics; Institute for Advanced Computational Science
Patrick S. Walker: University of Zurich, Department of Banking and Finance; OLZ AG

No 24-47, Swiss Finance Institute Research Paper Series from Swiss Finance Institute

Abstract: We introduce new path-dependent constraints within a sequential portfolio optimization framework designed to reduce turnover in frequently rebalanced investment strategies, such as momentum and short-term reversal. This method classifies individual assets into distinct groups based on their attractiveness from signal and rebalancing perspectives, effectively managing the trade-off between anomaly-based predictability and the required trading volume for exploitation. These constraints function independently from the ℓ 1 portfolio turnover regularization, which manages reallocation at the aggregated portfolio level, proving more effective in enhancing net profitability. The combined turnover management mechanisms reduce the turnover of daily-rebalanced momentum and reversal portfolios by 95-99%, aligning closely with traditional monthly-rebalanced strategies. Furthermore, our method captures signals more promptly, resulting in more stable portfolios, a substantial reduction in maximum drawdown from 76-99% to 22-49%, and an improvement in risk-adjusted net returns by 38-149%, all under realistic transaction cost assumptions.

Keywords: Fractional Differencing; Momentum Crashes; Momentum Factor; Portfolio Optimization; Regularization; Reversal Strategy (search for similar items in EconPapers)
JEL-codes: C32 C53 C61 G11 G17 (search for similar items in EconPapers)
Pages: 36 pages
Date: 2024-09
References: Add references at CitEc
Citations:

Downloads: (external link)
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4955388 (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:rp2447

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 ().