Hedging Momentum
40 Pages Posted: 2 Oct 2019
Date Written: June 24, 2019
Abstract
We assess empirically the intertemporal hedging for assets with momentum (we term it “intertemporal momentum” or IM). Consistent with the dynamic portfolio theory, we show that (1) IM significantly forecasts stock returns at both market level and firm level over long horizons and complements standard myopic momentum (MM); (2) IM strategies produce returns with a slightly lower mean (due to the cost of hedging), much lower volatility, higher skewness (due to the heavy penalty for very negative returns), and hence much higher Sharpe ratio (due to the investment target), comparing with MM; (3) because our IM strategies and static augmented MM strategies manage different risks, a simple combination of them not only generates low volatility as our intertemporal strategies but also high mean as static strategies, more than quadrupling Sharpe ratios of MM; (4) the strong performance of our strategies over long investment horizons reflects the fact that momentum depends heavily on horizons.
Keywords: Momentum, intertemporal hedging, dynamic portfolio strategies
JEL Classification: G11, G12, G17
Suggested Citation: Suggested Citation