Swing Trading Signals


Since 2013

  • 100% Quantified, data-driven and Backtested
  • We always show our results!
  • Signals every day via our site or email
  • Cancel at any time!

Optimization of Equity Momentum: (How) Does it Work?

Last Updated on 10 February, 2024 by Rejaul Karim

The research paper “Optimization of Equity Momentum: (How) Does it Work?” by Arco van Oord probes the performance of standard mean-variance optimized momentum in comparison to traditional equally weighted momentum strategy, considering the top and bottom only characteristic of momentum.

This phenomenon observes that stocks in the top decile of momentum’s ranking outperform, while those in the bottom decile underperform, with little variation in the performance of stocks in the intermediate deciles.

The study introduces a simplified bootstrapping methodology to demonstrate the significantly higher Sharpe-ratio of the optimized portfolio compared to its traditional counterpart.

Moreover, the optimized portfolio exhibits less time-varying equity risk factor return exposures, resulting in more stable returns over the business cycle and smaller drawdowns. This analysis contributes to a better understanding of the differences between optimized and traditional momentum strategies, assisting investors in making informed decisions.

Abstract Of Paper

Standard mean-variance optimized momentum outperforms the traditional equally weighted momentum strategy if the expected return vector used reflects momentum’s top and bottom only characteristic. This top and bottom only characteristic is the phenomenon that only the stocks in the top decile of momentum’s ranking outperform and that only stocks in the bottom decile underperform, while all stocks in the intermediate deciles of the ranking have similar performance. If the optimization does not take this phenomenon into account the portfolio is also long the deciles 2 to 5 and short the deciles 6 to 9, while all these positions thus do not add anything to the return of the strategy. A new simplified bootstrapping methodology shows that the Sharpe-ratio of 52.8 percent of the optimized portfolio is significantly higher (p-value of 0.006) than the Sharpe-ratio of 29.3 percent for traditional equally weighted momentum. The optimized portfolio also exhibit less time-varying equity risk factor return exposures than traditional momentum and as such have more stable returns over the business cycle and have smaller drawdowns.

Original paper – Download PDF

Here you can download the PDF and original paper of Optimization of Equity Momentum: (How) Does it Work?.

(An option to download will come shortly)

Author

Arco van Oord
De Nederlandsche Bank

Conclusion

In conclusion, the research paper “Optimization of Equity Momentum: (How) Does it Work?” by Arco van Oord demonstrates the superior performance of standard mean-variance optimized momentum compared to the traditional equally weighted momentum strategy, particularly when considering the top and bottom only characteristic of momentum.

The study’s introduction of a simplified bootstrapping methodology validates the significantly higher Sharpe-ratio exhibited by the optimized portfolio. In addition, the optimized portfolio displays less time-varying equity risk factor return exposures, leading to more stable returns over the business cycle and smaller drawdowns.

As a result, this analysis provides valuable insights into the performance differences between optimized and traditional momentum strategies, equipping investors with a deeper understanding of the nuances in these approaches and promoting more informed decision-making in the investment process.

Related Reading:

Overcoming Arbitrage Limits: Option Trading and Momentum Returns

Mandelbrot Market-Model and Momentum

FAQ

Q1: What is the main focus of the research paper by Arco van Oord?

The research paper focuses on the performance of standard mean-variance optimized momentum compared to the traditional equally weighted momentum strategy. It particularly considers the “top and bottom only” characteristic of momentum, where stocks in the top decile outperform, those in the bottom decile underperform, and stocks in intermediate deciles have similar performance.

Q2: How does the optimized momentum portfolio perform compared to the traditional momentum strategy?

The study demonstrates that the optimized momentum portfolio outperforms the traditional equally weighted momentum strategy. The optimized portfolio considers the top and bottom only characteristic of momentum, leading to a significantly higher Sharpe ratio compared to the traditional counterpart. The performance superiority is validated through a simplified bootstrapping methodology.

Q3: What are the key findings regarding the time-varying equity risk factor return exposures?

The optimized portfolio exhibits less time-varying equity risk factor return exposures compared to traditional momentum. This characteristic results in more stable returns over the business cycle and smaller drawdowns for the optimized portfolio. The study suggests that considering the top and bottom only characteristic in optimization leads to more robust and stable performance in various market conditions.

Check Our Academic Scholarly Database List For Traders here

Leave a Reply

{"email":"Email address invalid","url":"Website address invalid","required":"Required field missing"}

Monthly Trading Strategy Club

$42 Per Strategy

>

Login to Your Account



Signup Here
Lost Password