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Momentum Investing in a Nutshell?

Posted in Momentum Investing

How, in a nutshell, do momentum investing strategies work? In his December 2017 paper entitled "Keep Up the Momentum", Thierry Roncalli summarizes the nature of the momentum premium in a less mathematical way than in the previously available “Understanding the Momentum Risk Premium: An In-Depth Journey Through Trend-Following Strategies”. He distinguishes between:

  • Time-series or trend-following or intrinsic or absolute momentum (long assets with a positive past trend and short assets with a negative past trend).
  • Cross-sectional or relative or winners-minus-losers momentum (long assets that have outperformed and short assets that have underperformed relative to each other).

Based on mathematical derivations and prior research, he concludes that:

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