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Portfolio symmetry and momentum

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

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.

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Article provided by Elsevier in its journal European Journal of Operational Research.

Volume (Year): 214 (2011)
Issue (Month): 3 (November)
Pages: 759-767

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Handle: RePEc:eee:ejores:v:214:y:2011:i:3:p:759-767
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  1. K. Rouwenhorst, 1996. "International Momentum Strategies," Yale School of Management Working Papers ysm36, Yale School of Management, revised 01 Feb 2008.
  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. 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(02), pages 425-447, June.
  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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