Last Updated on 10 February, 2024 by Rejaul Karim
Take a deep dive into the world of financial tactics with “Risk-Managed 52-Week High Industry Momentum, Momentum Crashes, and Hedging Macroeconomic Risk,” a pioneering study written by Klaus Grobys, first published in July 2017. This thorough 38-page analysis examines the profitability of the risk-management methods proposed by Barroso and Santa-Clara, as applied to George and Hwang’s 52-week high momentum approach, within the context of an industrial portfolio.
Notably, the study reveals the increased value of risk management, as demonstrated by an elevated Sharpe ratio and a tremendous reduction in potential downside losses. Even after taking into account the spread of standard risk factors in the traditional 52-week high industry momentum approach, the risk-managed version still shows a considerable economic and statistical payout.
Investigate how this modern strategic approach is interconnected with the variations in cross-sectional return dispersion, introducing a fresh viewpoint on the inner workings of the conventional momentum method.
Abstract Of Paper
This is the first study to investigate the profitability of Barroso and Santa-Clara’s (2015) risk-managing approach for George and Hwang’s (2004) 52-week high momentum strategy in an industrial portfolio setting. The findings indicate that risk-managing adds value as the Sharpe ratio increases, and the downside risk decreases notably. Even after controlling for the spread of the traditional 52-week high industry momentum strategy in association with standard risk factors, the risk-managed version generates economically and statistically significant payoffs. Notably, the risk-managed strategy is partially explained by changes in cross-sectional return dispersion, whereas the traditional strategy does not appear to be exposed to such economic risks.
Original paper – Download PDF
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University of Vaasa; University of Jyväskyla
In delving into the realm of momentum strategies, Grobys pioneers an exploration of the risk-managed facet within the 52-week high momentum paradigm. The study not only establishes the profitability of this approach but unfurls a tapestry where risk management becomes a value-adding protagonist.
The Sharpe ratio’s ascent and a substantial reduction in downside risk underscore the potency of this methodology. Beyond the traditional 52-week high industry momentum, the risk-managed counterpart stands as a robust performer, yielding both economically and statistically significant payoffs.
Noteworthy is its resilience, even when subjected to the scrutiny of standard risk factors. This research not only unveils a nuanced dimension to momentum strategies but accentuates the role of risk management in navigating the complexities of industrial portfolio dynamics.
Q1: What is the main focus of Klaus Grobys’ study on “Risk-Managed 52-Week High Industry Momentum, Momentum Crashes, and Hedging Macroeconomic Risk”?
A1: The study explores the profitability and effectiveness of Barroso and Santa-Clara’s risk-managing approach applied to George and Hwang’s 52-week high momentum strategy. Specifically, it investigates the impact of risk management within the context of an industrial portfolio setting.
Q2: What are the key findings regarding the value of risk management in the 52-week high momentum strategy?
A2: The study demonstrates that risk management adds value to the 52-week high momentum strategy, leading to an increase in the Sharpe ratio and a notable reduction in downside risk. Even after accounting for standard risk factors and the spread of the traditional 52-week high industry momentum strategy, the risk-managed version shows both economically and statistically significant payoffs.
Q3: How does the risk-managed strategy interact with cross-sectional return dispersion, and what distinguishes it from the traditional strategy in this aspect?
A3: The risk-managed strategy is partially explained by changes in cross-sectional return dispersion. This introduces a fresh perspective on the conventional momentum method, highlighting its connection with variations in cross-sectional return dispersion. Importantly, the traditional strategy does not appear to be exposed to such economic risks, distinguishing it from the risk-managed approach in this aspect.