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Market Momentum. Theory and Practice. Edition No. 1. The Wiley Finance Series

  • Book

  • 432 Pages
  • October 2020
  • John Wiley and Sons Ltd
  • ID: 5840606

A one-of-a-kind reference guide covering the behavioral and statistical explanations for market momentum and the implementation of momentum trading strategies

Market Momentum: Theory and Practice is a thorough, how-to reference guide for a full range of financial professionals and students. It examines the behavioral and statistical causes of market momentum while also exploring the practical side of implementing related strategies.

The phenomenon of momentum in finance occurs when past high returns are followed by subsequent high returns, and past low returns are followed by subsequent low returns. Market Momentum provides a detailed introduction to the financial topic, while examining existing literature. Recent academic and practitioner research is included, offering a more up-to-date perspective.

What type of book is Market Momentum and how does it serve a range of readers’ interests and needs?

  • A holistic market momentum guide for industry professionals, asset managers, risk managers, firm managers, plus hedge fund and commodity trading advisors
  • Advanced text to help graduate students in finance, economics, and mathematics further develop their funds management skills
  • Useful resource for financial practitioners who want to implement momentum trading strategies
  • Reference book providing behavioral and statistical explanations for market momentum

Due to claims that the phenomenon of momentum goes against the Efficient Markets Hypothesis, behavioral economists have studied the topic in-depth. However, many books published on the subject are written to provide advice on how to make money.  In contrast, Market Momentum offers a comprehensive approach to the topic, which makes it a valuable resource for both investment professionals and higher-level finance students.

The contributors address momentum theory and practice, while also offering trading strategies that practitioners can study.

Table of Contents

Contributors xvii

Introduction xxiii

Chapter 1 Behavioural Finance and Momentum 1

1.1 Introduction 1

1.2 The failure of risk-based explanations 3

1.3 Behavioural models of momentum 3

1.4 Slow information diffusion 5

1.5 Patterns in information arrival 6

1.6 The 52-week high and capital gains overhang 8

1.7 Institutional trading and momentum profits 10

1.8 Sentiment and momentum 11

1.9 Discussion 12

Chapter 2 A Taxonomy of Momentum Strategies 16

2.1 Introduction 16

2.2 Relative strength strategies 17

2.3 Time-series momentum strategies 18

2.4 Cross-sectional momentum strategies 20

2.5 Cross-asset momentum 27

Chapter 3 Demystifying Time-Series Momentum Strategies: Volatility Estimators, Trading Rules and Pairwise Correlations 30

3.1 Data Description 34

3.2 Methodology 39

3.3 Turnover Reduction 42

3.4 The Recent Underperformance of Time-series Momentum Strategies and the Effect of Pairwise Correlations 52

3.5 Trading Costs Implications 58

3.6 Concluding Remarks 63

Chapter 4 Risk and Return of Momentum in Developed Equity Markets 68

4.1 Introduction 68

4.2 Definition of momentum 69

4.3 Simple factor portfolios 71

4.4 Multifactor structure 73

4.5 Pure factor portfolios 75

4.6 Empirical results: momentum performance 76

4.7 Empirical results: momentum risk 80

4.8 Diversification benefits 83

4.9 Summary 84

Chapter 5 Momentum Across Asset Classes 86

5.1 Measuring momentum 87

5.2 Framework: equity momentum and corporate credit risk 87

5.3 Empirical studies: momentum and credit risk 89

5.4 Our research on equity momentum and bond returns 91

5.5 Geographically bound assets 92

5.6 Momentum in other illiquid assets 94

5.7 Cross-asset class effects of commodities 95

5.8 Momentum effects and taxable investors 95

5.9 Active management and momentum effects 96

5.10 Conclusions 98

Chapter 6 Momentum in Momentum ETFs 103

6.1 Introduction 103

6.2 Why are momentum ETFs so popular? 104

6.3 What is in a momentum ETF? 112

6.4 Which factors drive active risk for momentum ETFs? 114

6.5 From constrained to unconstrained strategies 117

6.6 Conclusions 119

Chapter 7 CTA Momentum 120

7.1 Introduction 120

7.2 Time-series momentum (TSM) 121

7.3 Strategy return models 127

7.4 Time-series momentum 131

7.5 TSM meets CSM with two instruments 133

7.6 Conclusions 135

7.A.1 Appendix A: Correlation parameter restrictions 136

7.A.2 Appendix B: Proofs of variances and covariance 138

Chapter 8 Overreaction and Faint Praise - Short-Term Momentum in Contemporary Art 141

8.1 Introduction 141

8.2 Contemporary art market ecosystem 144

8.3 ArtForecaster data 145

8.4 Systematic forecasting strategies 149

8.5 Conclusions 157

Chapter 9 Volatility-Managed Momentum 160

9.1 Introduction 160

9.2 Data and momentum portfolio construction 161

9.3 Volatility-managed momentum strategies 162

9.4 Some potential practical issues 166

9.5 The best volatility measure for momentum? 170

9.6 Concluding remarks 172

Chapter 10 Theoretical Analysis of the Fama-French Portfolios 174

10.1 Introduction 174

10.2 Strategies, notation and preliminaries 179

10.3 Distribution of Fama-French factors 182

10.4 Fama-French factors with sequential sorting 189

10.5 Conclusion 194

10.A.1 Proof of Lemma 1 194

10.A.2 Proof of Theorem 3 195

10.A.3 Proof of Theorem 4 196

Chapter 11 Exploiting the Countercyclical Properties of Momentum and other Factor Premia - A Cross-Country Perspective 199

11.1 Introduction 199

11.2 Methodology 200

11.3 Alternative investment strategies 206

11.4 Quantifying the utility of risk premia strategies 211

11.5 Summary and conclusions 215

Chapter 12 Time-Series Variation in Factor Premia: The Influence of the Business Cycle 218

12.1 Introduction 218

12.2 Factors and factor rotation 219

12.3 Factors and the business cycle 220

12.4 Data and summary statistics 222

12.5 Empirical results 224

12.6 Conclusions 234

12.A.1 Derivation of cash-flow news series 234

12.A.2 US leading economic indicator and global risk appetite indicator 236

12.A.3 Dynamic multifactor strategy: extension to other market segments and regions 236

Chapter 13 Where Goes Momentum? 243

13.1 Introduction 243

13.2 Momentum strategies 245

13.3 Data 246

13.4 Method 247

13.5 Results 252

13.6 Risk-adjusted after-transaction costs performance of time-series and cross-sectional momentum strategies 260

13.7 Conclusions 269

Chapter 14 Time-Series Momentum in Credit: Machine Learning Approach 273

14.1 Introduction 273

14.2 The philosophy of artificial intelligence 274

14.3 Vanilla time-series momentum 277

14.4 Generalized linear models (GLM) - Lasso, Ridge and Elastic Net 280

14.5 Determining optimal hyper-parameters via cross-validation 283

14.6 Results: generalized linear models 284

14.7 Random forests 284

14.8 Neural networks 289

14.9 Results and comments 291

14.10 Conclusion 293

Chapter 15 Momentum and Business Cycles 297

15.1 Introduction 297

15.2 Momentum, business cycles and realised market return 298

15.3 Momentum and expected market risk premiums 301

15.4 Momentum, overconfidence and sentiment 309

15.5 Summary and conclusions 311

Chapter 16 Momentum as a Fundamental Risk Factor 314

16.1 Introduction 314

16.2 Defining momentum as a strategy 316

16.3 A new framework 318

16.4 From realised returns to forecast returns 319

16.5 Examining behaviour 319

16.6 The momentum trader as a bystander 323

16.7 Extending the model 325

16.8 Short-term versus long-term investors 326

16.9 The impact of the short-term investor 330

16.10 The momentum risk premium 332

16.11 The Apollo asset pricing model 334

16.12 Momentum alpha 335

16.13 Beta momentum 339

16.14 Beta signal 340

16.15 Momentum strategies 341

16.16 Results 347

16.17 Analysis of results 353

16.18 Conclusions 355

Chapter 17 Momentum, Value and Carry Commodity Factors for Multi-Asset Portfolios 359

17.1 Introduction 359

17.2 Methodology and key research questions 361

17.3 Commodity factors - insights from the historical data 362

17.4 Wealth accumulation strategies and rebalancing considerations 366

17.5 Wealth decumulation strategies 373

17.6 Long/short versus long only strategies 375

17.7 Completion portfolios versus maximum Sharpe ratio portfolios 379

17.8 Conclusions 380

17.A.1 Momentum factor 381

17.A.2 Carry factor 381

17.A.3 Value factor 382

17.A.4 From commodity factors to factor portfolios 383

17.A.5 Factor construction 383

Index 387

Authors

Stephen Satchell Andrew Grant Courtauld Institute of Art and Goldsmiths, University of London, UK.