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Unraveling Momentum’s Moments

Last Updated on 10 February, 2024 by Rejaul Karim

The research paper “Unraveling Momentum’s Moments” by Sunil Teluja delves into the momentum anomaly by examining higher-order risk-neutral moments of high and low momentum stocks.

The author uses option prices from 2002 to 2013 to extract time-varying ex ante estimates of variance, skewness, and kurtosis for high and low momentum stocks. The study finds that high momentum stocks exhibit lower variance, less negative skewness, and lower kurtosis.

This contrasts with previous research using static, ex post estimates of skewness to explain momentum returns as a function of exposure to higher-order moments of the underlying return distribution.

The findings highlight the difficulty of explaining momentum returns through ex-ante estimates of higher-order moments and emphasize the challenge of resolving this empirically within a rational expectations framework.

Abstract Of Paper

I examine the momentum anomaly through the prism of higher order risk neutral moments of high and low momentum stocks. I use option prices from 2002 to 2013 to extract time varying ex ante estimates of variance, skewness and kurtosis of high and low momentum stocks. High momentum stocks have lower variance, less negative skewness and lower kurtosis. This is in contrast to studies that use static, ex post estimates of skewness to explain momentum returns as a function of exposure to the higher order moments of the underlying return distribution. These results highlight that momentum returns can not be explained by ex ante estimates of higher order moments and remain dicult to resolve empirically in a rational expectations framework.

Original paper – Download PDF

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Author

Sunil Teluja
Eller College of Management, University of Arizona

Conclusion

In conclusion, Sunil Teluja’s research paper “Unraveling Momentum’s Moments” presents a novel examination of the momentum anomaly, focusing on the higher-order risk-neutral moments of high and low momentum stocks. By analyzing option prices from 2002 to 2013, the study uncovers that high momentum stocks exhibit lower variance, less negative skewness, and lower kurtosis compared to their low momentum counterparts.

These findings contrast with previous research relying on static, ex post estimates of skewness and challenge the explanation of momentum returns as a function of exposure to higher-order moments of the underlying return distribution.

Ultimately, the study emphasizes the difficulty in explaining momentum returns through ex ante estimates of higher-order moments and underscores the challenge of empirically resolving this phenomenon within a rational expectations framework.

Related Reading:

Fact, Fiction and Momentum Investing

Size, Value, and Momentum in Developed Country Equity Returns: Macroeconomic and Liquidity Exposures

FAQ

Q1: What is the focus of the research paper “Unraveling Momentum’s Moments” by Sunil Teluja?

The research paper focuses on unraveling the momentum anomaly by examining the higher-order risk-neutral moments of high and low momentum stocks. The author utilizes option prices from 2002 to 2013 to extract time-varying ex ante estimates of variance, skewness, and kurtosis for these stocks.

Q2: What are the key findings of the study regarding high and low momentum stocks?

The study reveals that high momentum stocks, in contrast to low momentum stocks, exhibit lower variance, less negative skewness, and lower kurtosis. These findings challenge previous research that used static, ex post estimates of skewness to explain momentum returns in relation to exposure to higher-order moments of the underlying return distribution.

Q3: How does the research contribute to our understanding of the momentum anomaly?

The findings of the research emphasize the difficulty of explaining momentum returns through ex ante estimates of higher-order moments. The study challenges existing explanations within a rational expectations framework and provides insights into the complex dynamics of the momentum anomaly, particularly concerning the role of risk-neutral moments in high and low momentum stocks.

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