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Momentum has its moments

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  • Barroso, Pedro
  • Santa-Clara, Pedro

Abstract

Compared with the market, value, or size factors, momentum has offered investors the highest Sharpe ratio. However, momentum has also had the worst crashes, making the strategy unappealing to investors who dislike negative skewness and kurtosis. We find that the risk of momentum is highly variable over time and predictable. Managing this risk virtually eliminates crashes and nearly doubles the Sharpe ratio of the momentum strategy. Risk-managed momentum is a much greater puzzle than the original version.

Suggested Citation

  • Barroso, Pedro & Santa-Clara, Pedro, 2015. "Momentum has its moments," Journal of Financial Economics, Elsevier, vol. 116(1), pages 111-120.
    • Handle: RePEc:eee:jfinec:v:116:y:2015:i:1:p:111-120
    DOI: 10.1016/j.jfineco.2014.11.010
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    More about this item

    Keywords

    Anomalies; Momentum; Time-varying risk; Transaction costs of momentum;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation

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