Momentum Crashes

Momentum in Investment Strategies
Momemtum Basics
US Equity Momentum: Risk & Return
International Equities/Other Asset Classes
Momentum Crashes
Kent Daniel & Tobias Moskowitz
Columbia Business School & NBER
Chicago Booth & NBER
Society of Quantitative Analysts

Fall Seminar
October 16, 2014
Daniel & Moskowitz, Momentum Crashes
SQA Fall Seminar 16October2014

Momemtum Basics
Introduction
Properties of Cross-Sectional Momentum
Momentum
Momentum is employed by most quantitative managers

(Swaminathan 2010)
Grinblatt and Titman (1989, 1993), Carhart (1997), and
subsequent empirical work suggests that mutual funds also
employ momentum.
Historically, momentum strategies deliver high premia.

Over the post WWII period, through 2008, the long-short
US equity momentum strategy well examine had an
average return of 16.5%/year, a market beta of -0.125, and
an annualized Sharpe-ratio of 0.82.

Momemtum Basics
Introduction
Evidence of Momentum
Momentum is pervasive:
US Equities: Jegadeesh and Titman (1993, 2001).
Developed Equities: Rouwenhorst (1998)
Emerging Equities: Rouwenhorst (1999)
Victorian Era Equities: Chabot, Remy, and Jagannathan
(2009) 1866-1907 British data.
Industries & Firm Specific (Equity): Moskowitz and
Grinblatt (1999), Grundy and Martin (2001).
Country Equity Indices: Asness, Liew, and Stevens (1997)
Currencies: Okunev and White (2003)
Commodities: Erb and Harvey (2006)
Futures: Asness, Moskowitz, and Pedersen (2013),
Moskowitz, Ooi, and Pedersen (2012).

Momemtum Basics
Introduction
Momentum Drawdowns
Momentum strategies perform well, but exhibit significant
negative skewness:
e.g., in March-May 2009, equity and other momentum
strategies suffered severe losses.
The April 2009 return was the worst since August, 1932.
Monthly momentum return skewness is -6.3.

For comparison, HML is +1.8, and the market is -0.58
The maximum monthly momentum return in our sample is

26.1%.
The 5 worst are -79%, -60%, -46%, -44%, and -42%.
Much like carry-trade strategies in currencies, momentum

strategies are sometimes perceived like selling out-of-the
money put options (see, e.g., Brunnermeier, Nagel, and
Pedersen (2008))

Momemtum Basics
Introduction
Momentum Drawdowns
negative skewness:


26.1%.
The 5 worst are -79%, -60%, -46%, -44%, and -42%.

Pedersen (2008))

Momemtum Basics
Introduction
Momentum Drawdowns
negative skewness:


26.1%.
The 5 worst are -79%, -60%, -46%, -44%, and -42%.

Pedersen (2008))

Momemtum Basics
Literature Review
Portfolio Construction
Crash Characterization
Literature Review
Behavioral theories of momentum:

Barberis, Shleifer, and Vishny (1998) Daniel, Hirshleifer,
and Subrahmanyam (1998), Hong and Stein (1999),
George and Hwang (2004), Grinblatt and Han (2005)
Time dependence in momentum risk:

Time dependence in momentum returns:
Optionality in past return sorted portfolios:

Momemtum Basics
Literature Review
Literature Review
Kothari and Shanken (1992) show that the market beta of
past-return based strategies should be, and are highly
dependent on the lagged market return.
Grundy and Martin (2001) show this for momentum
strategies, and further argue that a momentum portfolio
which hedges out market & size risk exhibits consistently
good performance. (using ex-post s).


Momemtum Basics
Literature Review
Literature Review

Cooper, Gutierrez, and Hameed (2004) demonstrate the
state dependence of momentum strategy returns
They dont control for conditional variations in risk.

Momemtum Basics
Literature Review
Literature Review

Rouwenhorst (1998), Chan (1988), DeBondt and Thaler
(1987), Boguth, Carlson, Fisher, and Simutin (2010).
Well show the state dependence of this optionality, and the
presence in non-equity strategies.

Momemtum Basics
Literature Review
Momentum: Portfolio Construction

At the end of each month, we form 10 value-weighted
momenutum portfolios on the basis of prior (12,2) return:
t-12
t-2
February (March)
Apr. '08
April '09
Holding
Period
(1 mo.)
Ranking Period
(11 months)
Over the one-month holding period, we will evaluate the

return of the top and bottom (winner and loser) deciles.
We also consider the long-short portfolio that invests $1 in
the winner portfolio, and shorts $1 worth of the loser
portfolio (=WML)

Momemtum Basics
Literature Review

t-12
t-2
February (March)
Apr. '08
April '09
Holding
Period
(1 mo.)
Ranking Period
(11 months)

portfolio (=WML)

Momemtum Basics
Literature Review

t-12
t-2
February (March)
Apr. '08
April '09
Holding
Period
(1 mo.)
Ranking Period
(11 months)

portfolio (=WML)

Momemtum Basics
Literature Review

At the end of each month, we re-form the portfolios based on
the updated ranking-period return:
t-12
t-2
February (March)
Apr. '08
Holding
Period
(1 mo.)
Ranking Period
(11 months)
t-12
t-2
May. '08
March
Ranking Period
(11 months)
April '09
(April)
May '09
Holding
Period
(1 mo.)

Momemtum Basics
Literature Review
While the portfolio are reblanced at the end of each month,

we generate daily returns for each of the ten portfolios.
This is necessary to accurately estimate the conditional risk
of the portfolios.
For a firm to be included in the portfolio, we require that:

The firm remain be listed on the NYSE, AMEX or NASDAQ.
The shares be common shares only (share-code 10 or 11)
The firm have valid prices and share data during the
formation period (for value weighting).

Momemtum Basics
Literature Review
Long-Only Investment Strategy Returns

105
Cumulative Gains from Investments, 1947:01-2006:12

risk-free
104
$ value of investment
103
102
$15.62
101
100
10-1
10-2 1949
1959
1969
1979
date
1989
1999

Momemtum Basics
Literature Review

105
104

risk-free
market
103
$754.11
102
$15.62
101
100
10-1
10-2 1949
1959
1969
1979
date
1989
1999

Momemtum Basics
Literature Review

105
104

risk-free
market
past losers
103
$754.11
102
$15.62
101
100
10-1
10-2 1949
$0.04
1959
1969
1979
date
1989
1999

Momemtum Basics
Literature Review

105
104

risk-free
market
past losers
past winners
$53829.84
103
$754.11
102
$15.62
101
100
10-1
10-2 1949
$0.04
1959
1969
1979
date
1989
1999

Momemtum Basics
Literature Review
2009-13 Momentum Performance

6
Cumulative Gains from Investments, Mar 09, 2009 - Mar 28, 2013
risk-free
market
past losers
past winners
($ value of investment)
4
3
2
1
Aug 2009
Feb 2010
Aug 2010
Feb 2011
Aug 2011
date
Feb 2012
Aug 2012
Feb 2013

Momemtum Basics
Literature Review
Momentum in the Great Depression

Cumulative Gains from Investments, Jun 01, 1932 - Dec 30, 1939
6
($ value of investment)
4
3
risk-free
market
past losers
past winners
1
1933
1934
1935
1936
date
1937
1938
1939

Momemtum Basics
Literature Review
Cumulative Momentum Returns

Cumulative Momentum Strategy Returns, Jan 1927-Mar 2013
107
106
Portfolio Value
105
104
103
102
101
100
10-1 1929
1939
1949
1959
1969
date
1979
1989
1999
2009

Momemtum Basics
Literature Review
15 Worst Monthly Momentum Returns

R ANK
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
M ONTH
1932-08
1932-07
2001-01
2009-04
1939-09
1933-04
2009-03
2002-11
1938-06
2009-08
1931-06
1933-05
2001-11
2001-10
1974-01
M OMt
-74.36
-60.98
-49.19
-45.52
-43.83
-43.14
-42.28
-37.04
-33.36
-30.54
-29.72
-28.90
-25.31
-24.98
-24.04
M KT-2 Y
-69.39
-76.22
-9.95
-46.33
-21.34
-60.33
-50.61
-43.85
-28.29
-32.15
-53.25
-39.39
-34.50
-32.27
-23.71
M KTt
36.49
33.48
2.58
10.18
16.64
37.67
8.93
5.84
23.69
3.31
13.61
21.26
7.37
2.25
-0.80
M KT-2 Y is the lagged 2-year market return

M KTt is the contemporaneous (1-month) market return.

Momemtum Basics
Literature Review
Bear Market Momentum Performance
The preceding table shows that the momentum strategy

suffers its worst performance at turning points, following
large market declines:
In June 1932, the market bottomed.
in July-August 1932, the market rose by 82%.
Over these 2 months, losers outperform winners by 206%.
losers gain 236%, winners gain 30%.
On March 9, 2009 the US equity market bottomed.

In March-May 2009, the market was up by 29%.
losers outperform winners by 149%.
losers gain 156%, winners gain 6.5%.

Momemtum Basics
Literature Review



Momemtum Basics
Literature Review



Momemtum Basics
Market Beta
WML Option
Dynamic Strategy Performance
Momentum Beta
As of March 2009, many the firms in the Loser portfolio
had fallen by 90% or more.
These were firms like Citigroup, Bank of America, Ford,
GM, and International Paper (which was levered)
In contrast, the Winner portfolio was composed of
defensive or counter-cyclical firms like Autozone.
The loser firms, in particular, were often extremely levered,

and at risk of bankruptcy.
Their common stock was effectively an out-of-the-money
option on the firm value ( l (Merton 1974))
This suggests that there were potentially large differences

in the market betas of the winner and loser portfolios

Momemtum Basics
Market Beta
WML Option
Momentum Beta



Momemtum Basics
Market Beta
WML Option
Momentum Beta



Momemtum Basics
Market Beta
WML Option
Market Beta and Momentum - 1927-1940

Rolling 126-day betas, 1927:06 - 1940:02
4.0
3.5
126 day (rolling) beta
3.0
2.5
2.0
1.5
1.0
0.5
0.0
192
192
193
193
193
193
4
193
date
193
193
193
193
193
194

Momemtum Basics
Market Beta
WML Option
Market Beta and Momentum - 1999-2013

Rolling 126-day betas, 1999:01 - 2013:03
126 day (rolling) beta
5
4
3
2
1
0
0
200
200
2
200
200
200
200
7
6
200 200
date
200
200
201
201
201
201

Momemtum Basics
Market Beta
WML Option
Estimating Beta
There is a strong Up- and Down- differential in bear markets:

e
WML,t = [0 + B IB ] + 0 + B IB + B,U (IB IU ) R
m,t + t
R
Coeff.
Variable
1
IB
e
R
m,t
e
IB R
m,t
B,U
R 2 _adj
e
IB IU R
m,t
Estimated Coefficients
(t-statistics in parentheses)
(1)
(2)
(3)
(4)
0.019
0.020
0.020
0.020
(7.3)
(7.7)
(7.8)
(8.4)
-0.021
0.005
(-3.5)
(0.6)
-0.577
-0.032
-0.032
-0.034
(-12.5)
(-0.5)
(-0.5)
(-0.6)
-1.136
-0.668
-0.710
(-13.4)
(-5.0)
(-6.2)
-0.810
-0.734
(-4.5)
(-5.7)
0.130
0.271
0.284
0.285
IB = 1 when the past 2-year market return is non-positive there are 186 Bear-market months.
IU = 1 when Rm,t > 0. This is not an ex-ante variable.

Momemtum Basics
Market Beta
WML Option
Estimating Beta

e
m,t + t
R
Coeff.
Variable
1
IB
e
R
m,t
e
IB R
m,t
B,U
R 2 _adj
e
IB IU R
m,t
(1)
(2)
(3)
(4)
0.019
0.020
0.020
0.020
(7.3)
(7.7)
(7.8)
(8.4)
-0.021
0.005
(-3.5)
(0.6)
-0.577
-0.032
-0.032
-0.034
(-12.5)
(-0.5)
(-0.5)
(-0.6)
-1.136
-0.668
-0.710
(-13.4)
(-5.0)
(-6.2)
-0.810
-0.734
(-4.5)
(-5.7)
0.130
0.271
0.284
0.285

Momemtum Basics
Market Beta
WML Option
Estimating Beta

e
m,t + t
R
Coeff.
Variable
1
IB
e
R
m,t
e
IB R
m,t
B,U
R 2 _adj
e
IB IU R
m,t
(1)
(2)
(3)
(4)
0.019
0.020
0.020
0.020
(7.3)
(7.7)
(7.8)
(8.4)
-0.021
0.005
(-3.5)
(0.6)
-0.577
-0.032
-0.032
-0.034
(-12.5)
(-0.5)
(-0.5)
(-0.6)
-1.136
-0.668
-0.710
(-13.4)
(-5.0)
(-6.2)
-0.810
-0.734
(-4.5)
(-5.7)
0.130
0.271
0.284
0.285

Momemtum Basics
Market Beta
WML Option
Estimating Beta

e
m,t + t
R
Coeff.
Variable
1
IB
e
R
m,t
e
IB R
m,t
B,U
R 2 _adj
e
IB IU R
m,t
(1)
(2)
(3)
(4)
0.019
0.020
0.020
0.020
(7.3)
(7.7)
(7.8)
(8.4)
-0.021
0.005
(-3.5)
(0.6)
-0.577
-0.032
-0.032
-0.034
(-12.5)
(-0.5)
(-0.5)
(-0.6)
-1.136
-0.668
-0.710
(-13.4)
(-5.0)
(-6.2)
-0.810
-0.734
(-4.5)
(-5.7)
0.130
0.271
0.284
0.285

Momemtum Basics
Market Beta
WML Option
Where is the Option?
This optionality is mostly in the loser portfolio:

For the past-loser portfolio, B,U = 0.60.
For the past-winner portfolio, B,U = 0.21.
The optionality is not present in BulL markets:

For past-loser portfolio, L,U = 0.02.

Momemtum Basics
Market Beta
WML Option
WML Option
Winner
Return
0
-10%
+10%
Market
Return
-10%
+10%
Market
Return
-10%
+10%
Market
Return
Loser
Return
0
WML
Return
0

Momemtum Basics
Market Beta
WML Option
Forecasting Crashes
We have seen that the payoff associated with the WML

portfolio has short-option-like characteristics.
It seems likely this this option will be more costly when
market variance is higher
This would also be consistent with a behavioral motivation
for our forecasting variable.
Based on this we investigate whether other variables

associated with perceived risk affect the payoff to
momentum strategies.
Specifically we look at market volatility related to the VIX.

Momemtum Basics
Market Beta
WML Option
Forecasting Crashes



Momemtum Basics
Market Beta
WML Option
Forecasting Crashes



Momemtum Basics
Market Beta
WML Option
Forecasting Momentum Returns
2
2
rWML,t = 0 + B IB,t1 + 2
m,t1
+ int IB,t1
m,t1
+ t
m
0
B
m2
(1)
0.020
(6.6)
-0.027
(-3.8)
(2)
0.036
(6.6)
-0.009
(-4.4)
int
(3)
0.033
(6.0)
-0.014
(-1.8)
-0.007
(-2.9)
(4)
0.021
(7.1)
-0.009
(-5.2)
(5)
0.022
(3.3)
0.025
(1.5)
-0.001
(-0.5)
-0.013
(-2.8)

Momemtum Basics
Market Beta
WML Option
Exposure to variance risk

RHS Vars.
IB2
(1)
31.48
(4.7)
-58.62
(-5.2)
rme
e
IB2 rm,t
rvs,t
IB2 rvs,t
(2)
29.94
(4.8)
-49.26
(-4.8)
0.109
(4.5)
-0.518
(-28.4)
(3)
30.39
(4.9)
-55.01
(-5.3)
0.105
(3.3)
-0.629
(-24.7)
-0.008
(-0.2)
-0.101
(-4.8)
Daily Regressions, January 2, 1990 to March 28, 2013.

rvs,t is the return to a variance-swap on the S&P 500.
and IB2 coeffficients are 252100 (i.e., in %/year)


Momemtum Basics
Market Beta
WML Option
Exposure to variance risk

RHS Vars.
IB2
(1)
31.48
(4.7)
-58.62
(-5.2)
rme
e
IB2 rm,t
rvs,t
IB2 rvs,t
(2)
29.94
(4.8)
-49.26
(-4.8)
0.109
(4.5)
-0.518
(-28.4)
(3)
30.39
(4.9)
-55.01
(-5.3)
0.105
(3.3)
-0.629
(-24.7)
-0.008
(-0.2)
-0.101
(-4.8)
Daily Regressions, January 2, 1990 to March 28, 2013.

rvs,t is the return to a variance-swap on the S&P 500.
and IB2 coeffficients are 252100 (i.e., in %/year)


Momemtum Basics
Market Beta
WML Option
Dynamic Strategy Returns

We next evalulate the performance of a strategy which
dynamically adjusts the weight on the basic wml strategy
based on the forecast return and volatility of the wml
strategy.
Et1 [rwml,t ] is forecast using the interaction on the
preceding slide (regression 4)
2
wml,t1
is forecast using a GARCH-like procedure applied
to daily wml returns:
The weight on wml at at the start of period t is:

wwml,t1 =
Et1 [rwml,t ]
2
wml,t1
Each strategy is scaled to give an unconditional volatility of

19%
equal to mkt over the full sample.

Momemtum Basics
Market Beta
WML Option

strategy.
2
wml,t1

wwml,t1 =
Et1 [rwml,t ]
2
wml,t1

19%

Momemtum Basics
Market Beta
WML Option

strategy.
2
wml,t1

wwml,t1 =
Et1 [rwml,t ]
2
wml,t1

19%

Momemtum Basics
Market Beta
WML Option

strategy.
2
wml,t1

wwml,t1 =
Et1 [rwml,t ]
2
wml,t1

19%

Momemtum Basics
Market Beta
WML Option
WML & Dynamic Strategy Returns

Cumulative Normalized Strategy Returns (19% ann. vol.) -- 1927:07-2013:03
wml
dynamic
c_vol
109
108
Portfolio Value ($)
107
106
105
104
103
102
101
100
1929
1939
1949
1959
1969
date
1979
1989
1999
2009

Momemtum Basics
Market Beta
WML Option
WML & Dynamic Strategy Returns - Subsamples

1926-1949
wml
dynamic
1.2
1.0
0.8
0.6
0.4
0.2
0.0
0.2
4.0
3.5
3.0
2.5
2.0
1.5
1.0
0.5
0.0
0.5
1929
1934
1939
1975-1999
1944
1949
wml
dynamic
3.5
3.0
2.5
2.0
1.5
1.0
0.5
0.0
0.5
0.8
0.6
1950-1974
wml
dynamic
1954
1959
1964
2000-2013
1969
1974
wml
dynamic
0.4
0.2
0.0
1979
1984
1989
1994
1999
2001 2003 2005 2007 2009 2011 2013

Momemtum Basics
Market Beta
WML Option

Subperiod
1927:01-2013:03
1927:01-1949:12
1950:01-1974:12
1975:01-1999:12
2000:01-2013:03
WML
0.60
0.27
1.31
1.48
0.27
Strategy S.R.
const. dynamic
1.01
1.18
0.63
0.68
1.51
1.67
1.69
1.85
0.59
0.96
The dynamic strategy almost doubles the Sharpe Ratio of the static
momentum strategy.
Moreover, the improvement is strong in each subperiod.

A constant volatility strategy provides a substantial improvement over
standard momentum.
See Barroso and Santa-Clara (2012).

However, exploiting the strong forecastability of the mean
gets you still superior performance.

Momemtum Basics
Market Beta
WML Option

Subperiod
1927:01-2013:03
1927:01-1949:12
1950:01-1974:12
1975:01-1999:12
2000:01-2013:03
WML
0.60
0.27
1.31
1.48
0.27
Strategy S.R.
const. dynamic
1.01
1.18
0.63
0.68
1.51
1.67
1.69
1.85
0.59
0.96
The dynamic strategy almost doubles the Sharpe Ratio of the static
momentum strategy.
Moreover, the improvement is strong in each subperiod.

A constant volatility strategy provides a substantial improvement over
standard momentum.
See Barroso and Santa-Clara (2012).

However, exploiting the strong forecastability of the mean
gets you still superior performance.

Momemtum Basics
Market Beta
WML Option
Dynamic Strategy Returns Skewness

Subperiod
1927:01-2013:03
1927:01-1949:12
1950:01-1974:12
1975:01-1999:12
2000:01-2013:03
Strategy S.R./(skewness)
WML
const. dynamic
0.60
1.01
1.18
(-4.70) (-0.76)
(0.09)
0.27
0.63
0.68
(-3.38) (-1.25)
(-0.99)
1.31
1.51
1.67
(-1.16) (-0.54)
(-0.05)
1.48
1.69
1.85
(-0.78) (-0.41)
(0.18)
0.27
0.59
0.96
(-1.50) (-0.68)
(0.14)
The dynamic strategy also exhibits considerably less negative

skewness.

Momemtum Basics
International Equity Markets

Other Asset Class Momentum
Dynamic Strategy in Other Asset Classes
Conclusions & Future Work
Momentum in Other Markets

The remarkably strong results for predictability in US equity
markets is consistent across the four quarter-century
subsamples.
To further assesss the robustness of the phenonmena we
document, we also investigate whether the predictability
and optionality patterns are also present in other markets
We examine 3 other equity markets, and 4 other asset
classes.
Data is similar to that in Asness, Moskowitz, and Pedersen
(2013).
Our momentum measure is 12-2 in each market

momentum portfolio is long top third, short bottom third.
We use a market return that corresponds to the asset

universe in which the momentum strategy is constructed.
Portfolios are VW for equities, EW for other asset classes.

Momemtum Basics


subsamples.
classes.
(2013).



Momemtum Basics


subsamples.
classes.
(2013).



Momemtum Basics


subsamples.
classes.
(2013).



Momemtum Basics

Data
International Equities
Other Asset Classes
Commodities
Currencies
Bonds
Equities

Momemtum Basics

Data
US, UK, Continental Europe, and Japan
In each market, universe is largest market capitalization
firms, such that we include 90% of the total market cap.
comprises 15-20% of names in each market.
Other Asset Classes

Commodities
Currencies
Bonds
Equities

Momemtum Basics

Data
Other Asset Classes
Commodities
Currencies
Bonds
Equities

Momemtum Basics

Data
Other Asset Classes
Commodities
27 commodities from 8 exchanges.
Oil and Gas, Metals, Agricultural.
Currencies
Bonds
Equities

Momemtum Basics

Data
Other Asset Classes
Commodities
Currencies
9 Currencies.
Australia, Canada, Germany (spliced with the Euro), Japan,
New Zealand, Norway, Sweden, Switzerland, and U.K.
Bonds
Equities

Momemtum Basics

Data
Other Asset Classes
Commodities
Currencies
Bonds
10 Government Bonds.
Australia, Canada, Denmark, Germany, Japan, Norway,
Sweden, Switzerland, U.K., and U.S.
Equities

Momemtum Basics

Data
Other Asset Classes
Commodities
Currencies
Bonds
Equities
18 Equity Indices
Australia, Austria, Belgium, Canada, Denmark, France,
Germany, Hong Kong, Italy, Japan, Netherlands, Norway,
Portugal, Spain, Sweden, Switzerland, U.K., and U.S.

Momemtum Basics

International Equity Market Momentum

Momemtum Basics

Past Market Returns and Market Variance

2
2 e
mom = [0 + B IB + V
R
m
] + [0 + B IB + V
m
]Rm,t + t .
t
V
0
B
V
Europe
0.010
(4.2)
0.003
(0.5)
-0.143
(-2.7)
0.109
(2.4)
-0.372
(-4.3)
-1.787
(-3.0)
Japan
0.005
(1.4)
0.002
(0.4)
-0.150
(-2.3)
0.242
(4.4)
-0.539
(-6.8)
0.449
(0.5)
UK
0.009
(3.5)
-0.001
(-0.1)
-0.141
(-2.3)
0.069
(1.6)
-0.092
(-1.2)
-2.390
(-2.9)
US
0.008
(3.2)
0.007
(1.2)
-0.197
(-3.3)
0.216
(3.6)
-0.523
(-5.0)
-1.836
(-2.1)
global
0.007
(4.7)
0.002
(0.4)
-0.116
(-3.1)
0.052
(1.4)
-0.201
(-2.8)
-1.011
(-1.9)

Momemtum Basics


2
2 e
mom = [0 + B IB + V
R
m
] + [0 + B IB + V
m
]Rm,t + t .
t
V
0
B
V
Europe
0.010
(4.2)
0.003
(0.5)
-0.143
(-2.7)
0.109
(2.4)
-0.372
(-4.3)
-1.787
(-3.0)
Japan
0.005
(1.4)
0.002
(0.4)
-0.150
(-2.3)
0.242
(4.4)
-0.539
(-6.8)
0.449
(0.5)
UK
0.009
(3.5)
-0.001
(-0.1)
-0.141
(-2.3)
0.069
(1.6)
-0.092
(-1.2)
-2.390
(-2.9)
US
0.008
(3.2)
0.007
(1.2)
-0.197
(-3.3)
0.216
(3.6)
-0.523
(-5.0)
-1.836
(-2.1)
global
0.007
(4.7)
0.002
(0.4)
-0.116
(-3.1)
0.052
(1.4)
-0.201
(-2.8)
-1.011
(-1.9)

Momemtum Basics

Optionality in Bear Markets

e
mom = [0 + B IB ] + 0 + B IB + B,U (IB IU ) R
+ t
R
t
m,t
B
0
B
B,U
Europe
0.007
(3.0)
0.012
(1.8)
0.075
(1.7)
-0.305
(-2.6)
-0.443
(-2.5)
Japan
-0.001
(-0.3)
0.013
(1.8)
0.248
(4.7)
-0.284
(-2.0)
-0.392
(-2.1)
UK
0.006
(2.6)
0.004
(0.6)
0.026
(0.6)
0.016
(0.1)
-0.329
(-2.2)
US
0.003
(1.2)
0.005
(0.5)
0.167
(2.9)
-0.556
(-3.2)
-0.085
(-0.3)
global
0.005
(3.2)
0.005
(1.0)
0.029
(0.8)
-0.092
(-0.9)
-0.338
(-2.2)

Momemtum Basics


Momemtum Basics


2
2 e
mom = [0 + B IB + V
R
m
] + [0 + B IB + V
m
]Rm,t + t
t
V
0
B
V
Bonds
0.001
(1.2)
-0.000
(-0.0)
-0.029
(-1.4)
0.290
(3.7)
-0.448
(-2.9)
-1.145
(-0.8)
Commods
0.013
(3.2)
-0.007
(-1.0)
-0.059
(-0.7)
0.250
(2.7)
-0.718
(-4.1)
0.876
(0.5)
Currencies
0.006
(2.8)
-0.009
(-3.0)
-0.013
(-0.4)
0.267
(2.9)
-0.987
(-7.3)
0.173
(0.2)
Equities
0.008
(3.8)
-0.001
(-0.2)
-0.020
(-0.5)
0.300
(6.2)
-0.585
(-7.0)
-0.957
(-1.4)
all
0.004
(4.4)
-0.001
(-0.4)
-0.025
(-1.2)
0.188
(2.7)
-0.360
(-2.6)
-1.558
(-1.5)
all+stock
0.005
(5.5)
0.000
(0.0)
-0.049
(-2.3)
0.109
(2.3)
-0.238
(-2.4)
-1.363
(-1.9)

Momemtum Basics


2
2 e
mom = [0 + B IB + V
R
m
] + [0 + B IB + V
m
]Rm,t + t
t
V
0
B
V
Bonds
0.001
(1.2)
-0.000
(-0.0)
-0.029
(-1.4)
0.290
(3.7)
-0.448
(-2.9)
-1.145
(-0.8)
Commods
0.013
(3.2)
-0.007
(-1.0)
-0.059
(-0.7)
0.250
(2.7)
-0.718
(-4.1)
0.876
(0.5)
Currencies
0.006
(2.8)
-0.009
(-3.0)
-0.013
(-0.4)
0.267
(2.9)
-0.987
(-7.3)
0.173
(0.2)
Equities
0.008
(3.8)
-0.001
(-0.2)
-0.020
(-0.5)
0.300
(6.2)
-0.585
(-7.0)
-0.957
(-1.4)
all
0.004
(4.4)
-0.001
(-0.4)
-0.025
(-1.2)
0.188
(2.7)
-0.360
(-2.6)
-1.558
(-1.5)
all+stock
0.005
(5.5)
0.000
(0.0)
-0.049
(-2.3)
0.109
(2.3)
-0.238
(-2.4)
-1.363
(-1.9)

Momemtum Basics

Optionality in Bear Markets

e
mom = [0 + B IB ] + 0 + B IB + B,U (IB IU ) R
+ t
R
t
m,t
B
0
B
B,U
Bonds
-0.002
(-1.5)
0.005
(1.5)
0.287
(4.5)
-0.346
(-0.9)
-0.211
(-0.4)
Commods
0.009
(2.4)
0.017
(1.8)
0.288
(3.7)
0.040
(0.1)
-1.327
(-2.6)
Currencies
0.003
(1.7)
0.008
(2.0)
0.302
(3.4)
-0.498
(-1.8)
-0.889
(-2.4)
Equities
0.005
(2.4)
0.010
(2.1)
0.283
(6.1)
-0.474
(-4.2)
-0.338
(-1.9)
all
0.002
(2.3)
0.008
(2.7)
0.183
(2.8)
0.260
(0.8)
-1.138
(-2.7)
all+stock
0.003
(3.4)
0.007
(2.3)
0.094
(2.1)
-0.024
(-0.2)
-0.692
(-3.2)

Momemtum Basics

Dynamic Strategy Performance: Equity Strategies

Annualized Strategy SR (skewness) by Region
EU
JP
UK
US
GE
start 06/90 06/90 06/90 07/72 07/72
end 05/13 05/13 05/13 05/13 05/13
Static WML
Const.
Dynamic
0.462
(-0.34)
0.886
(0.55)
1.130
(0.97)
Full-dynamic WML
0.067
(0.02)
0.160
(-0.13)
0.416
(1.41)
0.465
(-0.62)
0.751
(-0.02)
0.891
(0.36)
0.283
(-0.04)
0.519
(-0.09)
0.646
(0.08)
0.513
(-0.34)
0.732
(0.13)
0.752
(0.33)
0.956
(1.11)

Momemtum Basics


EU
JP
UK
US
GE
start 06/90 06/90 06/90 07/72 07/72
end 05/13 05/13 05/13 05/13 05/13
Static WML
Const.
Dynamic
0.462
(-0.34)
0.886
(0.55)
1.130
(0.97)
Full-dynamic WML
0.067
(0.02)
0.160
(-0.13)
0.416
(1.41)
0.465
(-0.62)
0.751
(-0.02)
0.891
(0.36)
0.283
(-0.04)
0.519
(-0.09)
0.646
(0.08)
0.513
(-0.34)
0.732
(0.13)
0.752
(0.33)
0.956
(1.11)

Momemtum Basics


EU
JP
UK
US
GE
start 06/90 06/90 06/90 07/72 07/72
end 05/13 05/13 05/13 05/13 05/13
Static WML
Const.
Dynamic
0.462
(-0.34)
0.886
(0.55)
1.130
(0.97)
Full-dynamic WML
0.067
(0.02)
0.160
(-0.13)
0.416
(1.41)
0.465
(-0.62)
0.751
(-0.02)
0.891
(0.36)
0.283
(-0.04)
0.519
(-0.09)
0.646
(0.08)
0.513
(-0.34)
0.732
(0.13)
0.752
(0.33)
0.956
(1.11)

Momemtum Basics


EU
JP
UK
US
GE
start 06/90 06/90 06/90 07/72 07/72
end 05/13 05/13 05/13 05/13 05/13
Static WML
Const.
Dynamic
0.462
(-0.34)
0.886
(0.55)
1.130
(0.97)
Full-dynamic WML
0.067
(0.02)
0.160
(-0.13)
0.416
(1.41)
0.465
(-0.62)
0.751
(-0.02)
0.891
(0.36)
0.283
(-0.04)
0.519
(-0.09)
0.646
(0.08)
0.513
(-0.34)
0.732
(0.13)
0.752
(0.33)
0.956
(1.11)

Momemtum Basics

Dynamic Strategy Performance in Other Asset

Classes
Annualized Strategy SR (skewness) by Asset Class:
FI
CM
start 06/83 02/73
end 05/13 05/13
Static WML
0.004 0.587
(-0.24) (0.01)
Const. WML
0.020 0.686
(-0.45) (-0.07)
Dynamic WML
0.066 0.803
(0.06) (0.39)
Full-dynamic WML
FX
02/80
05/13
0.296
(-0.54)
0.423
(-0.47)
0.653
(-0.20)
EQ
02/79
05/13
0.705
(-0.18)
0.800
(0.05)
0.843
(0.25)
GA
02/73
05/13
0.676
(-0.48)
0.791
(-0.31)
0.973
(0.11)
1.028
(-0.19)
GAll
02/73
05/13
0.754
(-0.33)
0.942
(-0.18)
1.139
(0.20)
1.223
(0.44)

Momemtum Basics


Classes
FI
CM
start 06/83 02/73
end 05/13 05/13
Static WML
0.004 0.587
(-0.24) (0.01)
Const. WML
0.020 0.686
(-0.45) (-0.07)
Dynamic WML
0.066 0.803
(0.06) (0.39)
Full-dynamic WML
FX
02/80
05/13
0.296
(-0.54)
0.423
(-0.47)
0.653
(-0.20)
EQ
02/79
05/13
0.705
(-0.18)
0.800
(0.05)
0.843
(0.25)
GA
02/73
05/13
0.676
(-0.48)
0.791
(-0.31)
0.973
(0.11)
1.028
(-0.19)
GAll
02/73
05/13
0.754
(-0.33)
0.942
(-0.18)
1.139
(0.20)
1.223
(0.44)

Momemtum Basics


Classes
FI
CM
start 06/83 02/73
end 05/13 05/13
Static WML
0.004 0.587
(-0.24) (0.01)
Const. WML
0.020 0.686
(-0.45) (-0.07)
Dynamic WML
0.066 0.803
(0.06) (0.39)
Full-dynamic WML
FX
02/80
05/13
0.296
(-0.54)
0.423
(-0.47)
0.653
(-0.20)
EQ
02/79
05/13
0.705
(-0.18)
0.800
(0.05)
0.843
(0.25)
GA
02/73
05/13
0.676
(-0.48)
0.791
(-0.31)
0.973
(0.11)
1.028
(-0.19)
GAll
02/73
05/13
0.754
(-0.33)
0.942
(-0.18)
1.139
(0.20)
1.223
(0.44)

Momemtum Basics


1
In normal environments, the market appears to

underreact to public information, resulting in consistent
price momentum.
However, in panic states, the market prices of severe past
losers embody a very high premium.
When market conditions ameliorate, these losers
experience strong gains, resulting in a momentum crash.
The expected gains from the loser portfolio are related to
both past market losses, and lagged market volatility.
Market risk of momentum portfolios varies dramatically, but

does not appear to explain the variation in the premium
earned by momentum.

Momemtum Basics


1

price momentum.

earned by momentum.

Momemtum Basics


1

price momentum.

earned by momentum.

Momemtum Basics

References I
Asness, Clifford S., John M. Liew, and Ross L. Stevens, 1997, Parallels between the cross-sectional predictability of
stock and country returns, Journal of Portfolio Management 23, 7987.
Asness, Clifford S., Toby J. Moskowitz, and Lasse Heje Pedersen, 2013, Value and momentum everywhere, The
Journal of Finance 58, 929895.
Barberis, Nicholas, Andrei Shleifer, and Robert Vishny, 1998, A model of investor sentiment, Journal of Financial
Economics 49, 307343.
Barroso, Pedro, and Pedro Santa-Clara, 2012, Managing the risk of momentum, Nova School of Business and
Economics working paper.
Boguth, Oliver, Murray Carlson, Adalai Fisher, and Mikhail Simutin, 2010, Conditional risk and performance
evaluation: Volatility timing, overconditioning, and new estimates of momentum alphas, Journal of Financial
Economics, forthcoming.
Brunnermeier, Markus K., Stefan Nagel, and Lasse H. Pedersen, 2008, Carry trades and currency crashes, NBER
Macroeconomics Annual.
Carhart, Mark M., 1997, On persistence in mutual fund performance, Journal of Finance 52, 5782.
Chabot, Benjamin, Eric Remy, Ghysels, and Ravi Jagannathan, 2009, Momentum cycles and limits to arbitrage evidence from victorian england and post-depression us stock markets, Working Paper.
Chan, K.C., 1988, On the contrarian investment strategy, Journal of Business 61, 147163.

Momemtum Basics

References II
Cooper, Michael J., Roberto C. Gutierrez, and Allaudeen Hameed, 2004, Market states and momentum, Journal of
Finance 59, 13451365.
Daniel, Kent D., David Hirshleifer, and Avanidhar Subrahmanyam, 1998, Investor psychology and security market
under- and over-reactions, Journal of Finance 53, 18391886.
DeBondt, Werner F. M., and Richard H. Thaler, 1987, Further evidence on investor overreaction and stock market
seasonality, Journal of Finance 42, 557581.
Erb, Claude B., and Campbell R. Harvey, 2006, The strategic and tactical value of commodity futures, Financial
Analysts Journal 62, 6997.
George, Thomas J., and Chuan-Yang Hwang, 2004, The 52-week high and momentum investing, The Journal of
Finance 59, 21452176.
Grinblatt, Mark, and Bing Han, 2005, Prospect theory, mental accounting and momentum, Journal of Financial
Grundy, Bruce, and J. Spencer Martin, 2001, Understanding the nature of the risks and the source of the rewards to
momentum investing, Review of Financial Studies 14, 2978.
Hong, Harrison, and Jeremy C. Stein, 1999, A unified theory of underreaction, momentum trading and overreaction
in asset markets, Journal of Finance 54, 21432184.

Momemtum Basics

References III
Jegadeesh, Narasimhan, and Sheridan Titman, 1993, Returns to buying winners and selling losers: Implications for
stock market efficiency, Journal of Finance 48, 6591.
, 2001, Profitability of momentum strategies: An evaluation of alternative explanations, Journal of Finance
56, 699720.
Kothari, S.P., and Jay Shanken, 1992, Stock return variation and expected dividends, Journal of Financial
Merton, Robert C., 1974, On the pricing of corporate debt: The risk structure of interest rates, The Journal of
Finance 29, 449470.
Moskowitz, Tobias J., and Mark Grinblatt, 1999, Do industries explain momentum?, The Journal of Finance 54,
12491290.
Moskowitz, Tobias J., Yoa Hua Ooi, and Lasse H. Pedersen, 2012, Time series momentum, Journal of Financial
Okunev, John, and Derek White, 2003, Do momentum-based strategies still work in foreign currency markets?,
Journal of Financial and Quantitative Analysis 38, 425447.
Rottenstreich, Yuval, and Chris K. Hsee, 2001, Money, kisses, and electric shocks: On the affective psychology of
risk, Psychological Science 12, 185190.
Rouwenhorst, K. Geert, 1998, International momentum strategies, Journal of Finance 53, 267284.

Momemtum Basics

References IV
, 1999, Local return factors and turnover in emerging stock markets, Journal of Finance 54, 14391464.
Swaminathan, Bhaskaran, 2010, Qunatitative money management: A practical application of behavioral finance,
Working Paper.

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Momentum in Investment Strategies

Society of Quantitative Analysts

Daniel & Moskowitz, Momentum Crashes

SQA Fall Seminar 16October2014

Momentum in Investment Strategies

Momentum is employed by most quantitative managers

Historically, momentum strategies deliver high premia.

Daniel & Moskowitz, Momentum Crashes

SQA Fall Seminar 16October2014

Momentum in Investment Strategies

SQA Fall Seminar 16October2014

Momentum in Investment Strategies

Monthly momentum return skewness is -6.3.

The maximum monthly momentum return in our sample is

Much like carry-trade strategies in currencies, momentum

SQA Fall Seminar 16October2014

Momentum in Investment Strategies

Monthly momentum return skewness is -6.3.

The maximum monthly momentum return in our sample is

Much like carry-trade strategies in currencies, momentum

SQA Fall Seminar 16October2014

Momentum in Investment Strategies

Monthly momentum return skewness is -6.3.

The maximum monthly momentum return in our sample is

Much like carry-trade strategies in currencies, momentum

SQA Fall Seminar 16October2014

Momentum in Investment Strategies

Behavioral theories of momentum:

Time dependence in momentum risk:

Daniel & Moskowitz, Momentum Crashes

SQA Fall Seminar 16October2014

Momentum in Investment Strategies

good performance. (using ex-post s).

Time dependence in momentum returns:

Daniel & Moskowitz, Momentum Crashes

SQA Fall Seminar 16October2014

Momentum in Investment Strategies

Behavioral theories of momentum:

Optionality in past return sorted portfolios:

Daniel & Moskowitz, Momentum Crashes

SQA Fall Seminar 16October2014

Momentum in Investment Strategies

Behavioral theories of momentum:

Daniel & Moskowitz, Momentum Crashes

SQA Fall Seminar 16October2014

Momentum in Investment Strategies

Momentum: Portfolio Construction

Over the one-month holding period, we will evaluate the

SQA Fall Seminar 16October2014

Momentum in Investment Strategies

Momentum: Portfolio Construction

Over the one-month holding period, we will evaluate the

SQA Fall Seminar 16October2014

Momentum in Investment Strategies

Momentum: Portfolio Construction

Over the one-month holding period, we will evaluate the

SQA Fall Seminar 16October2014

Momentum in Investment Strategies

Momentum: Portfolio Construction

Daniel & Moskowitz, Momentum Crashes

SQA Fall Seminar 16October2014

Momentum in Investment Strategies

Momentum: Portfolio Construction