Momentum Risk Premium Theory

What makes momentum investing tick? In their September 2017 paper entitled “Understanding the Momentum Risk Premium: An In-Depth Journey Through Trend-Following Strategies”, Paul Jusselin, Edmond Lezmi, Hassan Malongo, Côme Masselin, Thierry Roncalli and Tung-Lam Dao present a theoretical analysis of the momentum risk premium. They assume that asset prices generally exhibit geometric Brownian motion (randomness) with constant volatility, but with a time-varying trend. They examine momentum strategy performance based on this model and test some conclusions empirically on a multi-class set of asset indexes. Based on mathematical derivations and using monthly returns for a universe of four equity, four government bond, three interest rate, five currency and four commodity indexes during January 2000 through July 2017, they find that: (more…)