Avoiding Momentum’s Left Tail
July 9, 2012 - Momentum Investing
Is there a reliable signal for exiting a stock momentum strategy before months during which the strategy crashes? In the June 2012 version of their paper entitled “Tail Risk in Momentum Strategy Returns”, Kent Daniel, Ravi Jagannathan and Soohun Kim investigate conditions under which a basic U.S. stock momentum strategy performs very poorly and develop a model to anticipate these conditions. Their momentum strategy is each month long (short) the equally weighted tenth of NYSE, AMEX, and NASDAQ stocks with the highest (lowest) lagged 11-month returns, with a skip month between ranking interval and portfolio formation. Their method of anticipating conditions associated with poor momentum returns is a fairly complex two-regime (calm or turbulent) market state model derived from momentum portfolio returns relative to market returns during the momentum ranking interval and other lagged market return statistics. Using the monthly momentum decile portfolio returns from Kenneth French’s data library for July 1929 through December 2010 (978 months), they find that: Keep Reading