Investment Horizon Related Momentum in Volatility Scaled Momentum Strategies

43 Pages Posted: 6 Feb 2018 Last revised: 7 Jul 2020

See all articles by Hilal Anwar Butt

Hilal Anwar Butt

University of Karachi - Institute of Business Administration (IBA), Karachi

Mohsin Sadaqat

Institute of Business Administration, Karachi

Muhammad Tahir Suleman

University of Otago - Department of Accountancy and Finance

Date Written: January 19, 2018

Abstract

Recent studies have shown that the Sharpe ratio and alpha for the momentum strategy can be increased, by scaling the momentum strategy, by the inverse of its historical volatility. However, we find that the higher Sharpe ratio and the alphas of the volatility scaled momentum strategy, in comparison to traditional momentum strategy, depends on the length of the investment horizon. Such that, the longer the investment horizon the better is the performance of the volatility scaled momentum strategy. It is further shown that the higher returns associated with volatility scaled strategies for different horizons have no risk-based explanation and instead linked with the variance of long side of scaled strategies. The main underpinning of these findings is the persistence in the volatility of momentum strategy and its negative predictive relationship with momentum returns that only exist when volatility of momentum strategy is higher.

Keywords: Scaled Momentum Strategies; Volatility Persistence; Sharpe Ratios; Idiosyncratic risk

JEL Classification: G10; G12; G15

Suggested Citation

Butt, Hilal Anwar and Sadaqat, Mohsin and Suleman, Muhammad Tahir, Investment Horizon Related Momentum in Volatility Scaled Momentum Strategies (January 19, 2018). Available at SSRN: https://ssrn.com/abstract=3105416 or http://dx.doi.org/10.2139/ssrn.3105416

Hilal Anwar Butt (Contact Author)

University of Karachi - Institute of Business Administration (IBA), Karachi ( email )

University Road
Karachi, Sindh 75270
Pakistan

Mohsin Sadaqat

Institute of Business Administration, Karachi ( email )

Sector H-12
Islamabad, 44000
Pakistan

Muhammad Tahir Suleman

University of Otago - Department of Accountancy and Finance ( email )

PO Box 56
Dunedin, 9054
New Zealand

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