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Robust Optimization of the Equity Momentum Strategy

Author

Listed:
  • Arco van Oord

    (Erasmus University Rotterdam)

  • Martin Martens

    (Erasmus University Rotterdam)

  • Herman K. van Dijk

    (Erasmus University Rotterdam)

Abstract

Quadratic optimization for asset portfolios often leads to error maximization, with optimizers zooming in on large errors in the predicted inputs, that is, expected returns and risks. The consequence in most cases is a poor real-time performance. In this paper we show how to improve real-time performance of the popular equity momentum strategy with robust optimization in an empirical application involving 1500-2500 US stocks over the period 1963-2006. We also show that popular procedures like Bayes-Stein estimated expected returns, shrinking the covariance matrix and adding weight constraints fail in such a practical case.

Suggested Citation

  • Arco van Oord & Martin Martens & Herman K. van Dijk, 2009. "Robust Optimization of the Equity Momentum Strategy," Tinbergen Institute Discussion Papers 09-011/4, Tinbergen Institute.
    • Handle: RePEc:tin:wpaper:20090011
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    quadratic optimization; momentum strategy; robust optimization;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

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