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Risk-Managed Industry Momentum and Momentum Crashes

Last Updated on 10 February, 2024 by Rejaul Karim

Venture into the intricate domain of risk-managed momentum strategies with “Risk-Managed Industry Momentum and Momentum Crashes.” Authored by Klaus Grobys, Joni Ruotsalainen, and Janne Jaakko Äijö, the study delves into Barosso and Santa-Clara’s (2015) risk-managed momentum approach.

It probes various well-established momentum schemes, including those suggested by Novy-Marx (2012), and explores the impacts of varying variance forecast horizons on average payoffs. Furthermore, it tests the hypothesis of optionality effects by Daniel and Moskowitz (2016). Results indicate that neither standard industry momentum strategies nor risk-managed ones exhibit optionality effects, hinting that these strategies possess no time-varying beta.

Resilience of risk management tactics across volatility estimators, momentum strategies, and subsamples is also stressed. The study’s last notable find is the ‘echo effect’ being limited to most recent subsamples. This research is indeed a thoughtful dissection of momentum strategies.

Abstract Of Paper

This paper investigates Barosso and Santa-Clara’s (2015) risk-managed momentum strategy in an industry momentum setting. We investigate several traditional momentum strategies including that recently proposed by Novy-Marx (2012). We moreover examine the impact of different variance forecast horizons on average payoffs and also Daniel and Moskowitz’s (2016) optionality effects. Our results show in general that neither plain industry momentum strategies nor the risk-managed industry momentum strategies are subject optionality effects, implying that these strategies have no time-varying beta. Moreover, the benefits of risk management are robust across volatility estimators, momentum strategies and subsamples. Finally, the “echo effect” in industries is not robust in subsamples as the strategy works only during the most recent subsample.

Original paper – Download PDF

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Author

Klaus Grobys
University of Vaasa; University of Jyväskyla

Joni Ruotsalainen
Inderes Oy

Janne Jaakko Äijö
University of Vaasa, Department of Accounting and Finance

Conclusion

In conclusion, the paper “Risk-Managed Industry Momentum and Momentum Crashes” provides valuable insights into Barosso and Santa-Clara’s (2015) risk-managed momentum strategy. The exploration of several traditional momentum strategies, including Novy-Marx’s (2012) approach, reveals that neither standard nor risk-managed industry momentum strategies exhibit optionality effects, indicating a non-variable beta in these strategies.

The benefits of risk management strategies show robustness across volatility estimators, momentum plans, and subsamples, underscoring their resilience in various contexts. However, the ‘echo effect’ in industries appears to be less robust, operating solely within the most recent subsample.

The findings offer vital knowledge on industry momentum and optionality effects whilst shedding light on asset pricing and momentum crashes. Notably, this study boasts significant contribution towards enhancing understanding of momentum strategies in asset pricing and industry momentum.

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FAQ

What is the main focus of the paper “Risk-Managed Industry Momentum and Momentum Crashes”?

The paper explores Barosso and Santa-Clara’s (2015) risk-managed momentum strategy within an industry momentum context. It investigates traditional momentum strategies, including Novy-Marx’s (2012) approach, and examines the impact of different variance forecast horizons. Additionally, the study explores optionality effects as proposed by Daniel and Moskowitz (2016).

Do standard industry momentum strategies and risk-managed ones exhibit optionality effects?

The results of the study indicate that neither standard industry momentum strategies nor risk-managed ones exhibit optionality effects. The implication is that these strategies have a non-variable beta, providing insights into the behavior of risk-managed momentum strategies within the examined frameworks.

What are the key findings regarding the resilience of risk management tactics and the ‘echo effect’ in the paper?

The paper highlights the robustness of risk management tactics across volatility estimators, momentum strategies, and subsamples, emphasizing their consistent benefits in various contexts. However, the ‘echo effect’ in industries appears to be limited to the most recent subsamples, indicating a time-sensitive nature. The findings contribute to understanding the dynamics of risk management strategies and the nuances of industry momentum over different time frames.

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