### Average Past Return Sign Momentum

**June 8, 2017** - Commodity Futures, Momentum Investing

Does average sign of recent returns work as well as recent cumulative return as a momentum metric? In their May 2017 paper entitled “Returns Signal Momentum”, Fotis Papailias, Jiadong Liu and Dimitrios Thomakos introduce and test a momentum strategy (RSM) based on the equally weighted average signs (1 for positive and 0 for negative) of past returns over a given lookback interval. This metric employs each of the past returns during the lookback interval, not a single cumulative return as in times series (intrinsic or absolute) momentum. It considers only signs of past returns, not their magnitudes as in conventional relative momentum. They focus on monthly returns over a lookback interval of 12 months. They test RSM on a universe of 55 of the most liquid futures/forwards: 24 commodities; 9 currency exchange rates versus the U.S. dollar; 9 developed country equity indexes; and, 13 government bonds of various maturities from six developed countries. Their strategy is each month long (short) a contract series when average sign of its last 12 monthly returns is above (below) a threshold. They consider two types of thresholds: (1) fixed over the test period, with the featured optimal value selected by experimentation; and, (2) time-varying, each month choosing the best-performing value (from among 0.2, 0.3, 0.4, 0.5, 0.6, 0.7 and 0.8) over the prior 24 months. Using returns for the 55 futures/forwards series as available to support a strategy test period of January 1985 through March 2015, *they find that:*

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