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Size Matters: Tail Risk, Momentum and Trend Following in International Equity Portfolios

Author

Listed:
  • Andrew Clare
  • James Seaton
  • Peter N. Smith
  • Stephen Thomas

Abstract

We investigate the relationship between size and momentum across a wide range of international equity markets. A distinction is made between relative momentum where assets are ranked according to their performance against each other, and absolute momentum (or trend following) where assets are categorized according to whether they have recently exhibited positive, nominal return characteristics. We find only limited evidence for the outperformance of relative momentum portfolios. Trend following, however, is observed to be a very effective strategy over the study period delivering superior risk-adjusted returns across a range of size categories in both developed and emerging markets while not reversing the performance superiority of smaller firms. We also find, contrary to popular perception, that it is the mid cap-sector that dominates in emerging markets and suggest that this sector should be considered as the equivalent to developed economy small-cap investing.

Suggested Citation

  • Andrew Clare & James Seaton & Peter N. Smith & Stephen Thomas, 2015. "Size Matters: Tail Risk, Momentum and Trend Following in International Equity Portfolios," Discussion Papers 15/06, Department of Economics, University of York.
  • Handle: RePEc:yor:yorken:15/06
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    File URL: https://www.york.ac.uk/media/economics/documents/discussionpapers/2015/1506.pdf
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    References listed on IDEAS

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    1. repec:eee:beexfi:v:9:y:2016:i:c:p:63-80 is not listed on IDEAS
    2. Clare, Andrew & Seaton, James & Smith, Peter N. & Thomas, Stephen, 2016. "The trend is our friend: Risk parity, momentum and trend following in global asset allocation," Journal of Behavioral and Experimental Finance, Elsevier, vol. 9(C), pages 63-80.
    3. Szakmary, Andrew C. & Shen, Qian & Sharma, Subhash C., 2010. "Trend-following trading strategies in commodity futures: A re-examination," Journal of Banking & Finance, Elsevier, vol. 34(2), pages 409-426, February.
    4. Keim, Donald B., 1983. "Size-related anomalies and stock return seasonality : Further empirical evidence," Journal of Financial Economics, Elsevier, vol. 12(1), pages 13-32, June.
    5. Miffre, Joelle & Rallis, Georgios, 2007. "Momentum strategies in commodity futures markets," Journal of Banking & Finance, Elsevier, vol. 31(6), pages 1863-1886, June.
    6. 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.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    International equity markets; firm size; momentum; trend following; tail risk;

    JEL classification:

    • G0 - Financial Economics - - General
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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