Global Asset Allocation Use of momentum in trading
Global Asset Allocation Use of momentum in trading across industry sectors Yuri Krapivin Yuk Ping Ng Pierre Oustinow Jonathan Steinmetz Terence Tong
Agenda Objective n Implementation & Methodology n Results n Improvements n
Objective n Develop and test a momentum based strategy to trade across Industry Sectors
Implementation Data: u 130 S&P 500 sectors u Monthly returns from Jan 83 to Mar 00 n Principle: u Sort according return (univariate model) u Form BUY and SELL portfolios u Take new position every month n
Methodology - Portfolios n BUY Portfolio u Top x% performers in terms of total return for periods varying between 1 month and 1 year in the past n SELL Portfolio u Worst x% performers
Methodology – Trading positions n Monthly trading positions: u Long “BUY portfolio” for a period varying between 1 month and 1 year u Short “SELL portfolio” for a period varying between 1 month and 1 year u No cash investment: Short position finances Long position
Results – Portfolio composition Sample: Jan 84 - Dec 94 n Higher total returns achieved for: u Portfolios: top / bottom 5% u Trading position (backward / forward): t 1/1, 12/6 t Consistent across portfolio (fractile) composition n
Results – Portfolio performance
Annual Results 12/6 W/O Knockout
Results – Returns w/o Knockout
Results – Returns w/ Knockout
Results In Sample: Knock out does not substantially improve performance n Out of Sample: Knock out significantly decreases returns performance n n Knock out should not be used in conjunction with a momentum strategy
Theory n Momentum effect is not sector specific but moves across sectors n A momentum based trading strategy should therefore account for momentum shifting across industry sectors
Improvements Calculate market exposure n Consider other time periods n Extend to other asset classes and/or other markets n On / Off Trigger n Optimize in conjunction with other asset classes n
- Slides: 14