Revisiting (Revitalizing) Momentum
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School of Business |
Bachelor's thesis
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Authors
Date
2024
Department
Major/Subject
Mcode
Degree programme
Rahoitus
Language
en
Pages
26+3
Series
Abstract
In this thesis, I investigate the impact of varying definitions of cross-sectional momentum on the performance of long-short momentum strategies under different market conditions. A long-short momentum portfolio takes a long position in stocks that have shown strong previous performance and shorts those with poor past performance. Over recent decades, the returns from standard long-short momentum portfolios have declined, prompting both academics and practitioners to explore numerous approaches to diagnose and remedy the issues inherent in these strategies. I construct classical long-short momentum portfolios and investigate simple methods to counteract the diminished returns of these strategies. A notable challenge within momentum strategies is their tendency to "crash"—that is, after a period of significant gains, these portfolios often suffer abrupt, substantial losses. I propose a specific solution to manage these crash risks effectively, conditional on market states. The asset pricing and portfolio management literature offers various complex methods to construct long-short portfolios. However, my objective is to demonstrate that relatively minor improvements can significantly rejuvenate the long-short momentum strategy, also known as the premium anomaly. I discover that techniques such as volatility scaling and adjusting long and short positions based on the market state can significantly enhance the efficacy of the momentum strategy, restoring its former robustness.Description
Thesis advisor
Keloharju, MattiKeywords
asset pricing, momentum, portfolio management, anomaly