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Portfolio symmetry and momentum

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  • Billio, Monica
  • Calès, Ludovic
  • Guégan, Dominique

Abstract

This paper presents a novel theoretical framework to model the evolution of a dynamic portfolio (i.e., a portfolio whose weights vary over time), considering a given investment policy. The framework is based on graph theory and the quantum probability. Embedding the dynamics of a portfolio into a graph, each node of the graph representing a plausible portfolio, we provide the probabilities for a dynamic portfolio to lie on different nodes of the graph, characterizing its optimality in terms of returns. The framework embeds cross-sectional phenomena, such as the momentum effect, in stochastic processes, using portfolios instead of individual stocks. We apply our methodology to an investment policy similar to the momentum strategy of Jegadeesh and Titman (1993). We find that the strategy symmetry is a source of momentum.

Suggested Citation

  • Billio, Monica & Calès, Ludovic & Guégan, Dominique, 2011. "Portfolio symmetry and momentum," European Journal of Operational Research, Elsevier, vol. 214(3), pages 759-767, November.
    • Handle: RePEc:eee:ejores:v:214:y:2011:i:3:p:759-767
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    References listed on IDEAS

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    1. Okunev, John & White, Derek, 2003. "Do Momentum-Based Strategies Still Work in Foreign Currency Markets?," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 38(2), pages 425-447, June.
    2. Barberis, Nicholas & Shleifer, Andrei & Vishny, Robert, 1998. "A model of investor sentiment," Journal of Financial Economics, Elsevier, vol. 49(3), pages 307-343, September.
    3. K. Geert Rouwenhorst, 1998. "International Momentum Strategies," Journal of Finance, American Finance Association, vol. 53(1), pages 267-284, February.
    4. Jegadeesh, Narasimhan & Titman, Sheridan, 1993. "Returns to Buying Winners and Selling Losers: Implications for Stock Market Efficiency," Journal of Finance, American Finance Association, vol. 48(1), pages 65-91, March.
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    Citations

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    Cited by:

    1. Monica Billio & Ludovic Calès & Dominique Guegan, 2012. "Cross-Sectional Analysis through Rank-based Dynamic Portfolios," Post-Print halshs-00707430, HAL.
    2. Pätäri, Eero & Karell, Ville & Luukka, Pasi & Yeomans, Julian S, 2018. "Comparison of the multicriteria decision-making methods for equity portfolio selection: The U.S. evidence," European Journal of Operational Research, Elsevier, vol. 265(2), pages 655-672.
    3. Monica Billio & Ludovic Calès & Dominique Guegan, 2012. "Cross-Sectional Analysis through Rank-based Dynamic," Documents de travail du Centre d'Economie de la Sorbonne 12036, Université Panthéon-Sorbonne (Paris 1), Centre d'Economie de la Sorbonne.
    4. Timo H. Leivo, 2012. "Combining value and momentum indicators in varying stock market conditions," Review of Accounting and Finance, Emerald Group Publishing Limited, vol. 11(4), pages 400-447, October.
    5. López-García, M.N. & Trinidad-Segovia, J.E. & Sánchez-Granero, M.A. & Pouchkarev, I., 2021. "Extending the Fama and French model with a long term memory factor," European Journal of Operational Research, Elsevier, vol. 291(2), pages 421-426.
    6. Pätäri, Eero & Leivo, Timo & Honkapuro, Samuli, 2012. "Enhancement of equity portfolio performance using data envelopment analysis," European Journal of Operational Research, Elsevier, vol. 220(3), pages 786-797.

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    More about this item

    Keywords

    (P) Finance Graph theory Momentum Quantum probability Spectral analysis;

    JEL classification:

    • C14 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Semiparametric and Nonparametric Methods: General
    • C44 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Operations Research; Statistical Decision Theory

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