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Keep up the momentum

Author

Listed:
  • Thierry Roncalli

    () (Amundi Asset Management
    University of Evry)

Abstract

Abstract The pricing mechanisms that lay behind the momentum risk premium, which is seen as one of the most important alternative risk premia alongside the carry premium, seem not well understood. In the finance literature, there is no consensus on whether a momentum investment gears towards asset selection (alpha) or rather towards a systematic exposure to risk (beta). Does selecting the trending assets within a market introduce a skew or convexity into the expected return distribution? Does it modify the price correlation relationships with respect to other positions that are taken in a portfolio? The goal of this paper is to address these questions and define what momentum investing stands for. What characterises momentum investing is to us its capacity to diversify which is particularly pronounced in stressed markets. This market-timing aspect we observe is of interest for long investors, as the price decorrelation that is provoked comes when it is most needed. We make evident that the diversification asymmetry is less relevant for a long–short absolute-return investment.

Suggested Citation

  • Thierry Roncalli, 2018. "Keep up the momentum," Journal of Asset Management, Palgrave Macmillan, vol. 19(5), pages 351-361, September.
  • Handle: RePEc:pal:assmgt:v:19:y:2018:i:5:d:10.1057_s41260-018-0078-7
    DOI: 10.1057/s41260-018-0078-7
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    References listed on IDEAS

    as
    1. Roncalli, Thierry, 2013. "Introduction to Risk Parity and Budgeting," MPRA Paper 47679, University Library of Munich, Germany.
    2. Carhart, Mark M, 1997. " On Persistence in Mutual Fund Performance," Journal of Finance, American Finance Association, vol. 52(1), pages 57-82, March.
    3. Grinblatt, Mark & Titman, Sheridan & Wermers, Russ, 1995. "Momentum Investment Strategies, Portfolio Performance, and Herding: A Study of Mutual Fund Behavior," American Economic Review, American Economic Association, vol. 85(5), pages 1088-1105, December.
    4. Nicole El Karoui & Monique Jeanblanc-Picquè & Steven E. Shreve, 1998. "Robustness of the Black and Scholes Formula," Mathematical Finance, Wiley Blackwell, vol. 8(2), pages 93-126.
    5. Fung, William & Hsieh, David A, 2001. "The Risk in Hedge Fund Strategies: Theory and Evidence from Trend Followers," Review of Financial Studies, Society for Financial Studies, vol. 14(2), pages 313-341.
    6. De Bondt, Werner F M & Thaler, Richard, 1985. " Does the Stock Market Overreact?," Journal of Finance, American Finance Association, vol. 40(3), pages 793-805, July.
    7. Ang, Andrew, 2014. "Asset Management: A Systematic Approach to Factor Investing," OUP Catalogue, Oxford University Press, number 9780199959327.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    Momentum; Trend-following; Diversification; Payoff;

    JEL classification:

    • C50 - Mathematical and Quantitative Methods - - Econometric Modeling - - - General
    • C60 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - General
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

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