EconPapers    
Economics at your fingertips  
 

Taming Momentum Crashes

Daniele Bianchi, Andrea De Polis and Ivan Petrella

No 19030, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: The return on conventional momentum portfolios exhibits a predominantly negative, time-varying skewness, which deepens during the so-called momentum ``crashes''. This has important implications for the dynamic of the risk-return trade-off associated with momentum investing: the relationship between the strategy's expected return and volatility is time-varying and depends on conditional skewness. We explore the economic underpinnings of time-varying skewness by timing the capital exposure to momentum portfolios in response to fluctuations in risk. The results show that a dynamic skewness-adjusted maximum Sharpe ratio strategy significantly improves upon popular volatility scaling approaches. Finally, we show that the dynamic of the momentum return skewness cannot be fully reconciled with an asymmetric exposure to upside and downside market risk.

Keywords: Risk-return; trade-off (search for similar items in EconPapers)
JEL-codes: G10 (search for similar items in EconPapers)
Date: 2024-04
References: Add references at CitEc
Citations:

Downloads: (external link)
https://cepr.org/publications/DP19030 (application/pdf)
CEPR Discussion Papers are free to download for our researchers, subscribers and members. If you fall into one of these categories but have trouble downloading our papers, please contact us at subscribers@cepr.org

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:cpr:ceprdp:19030

Ordering information: This working paper can be ordered from
https://cepr.org/publications/DP19030

Access Statistics for this paper

More papers in CEPR Discussion Papers from C.E.P.R. Discussion Papers Centre for Economic Policy Research, 33 Great Sutton Street, London EC1V 0DX.
Bibliographic data for series maintained by ().

 
Page updated 2025-03-23
Handle: RePEc:cpr:ceprdp:19030