We show that conditional skewness and kurtosis of the momentum strategy are highly time-varying, take extreme values and sometimes may not exist. The high negative skewness and high kurtosis arise since winners’ and losers’ skewness moves in opposite direction whereas kurtosis comoves. Moreover, momentum returns do not follow a random walk. Exploiting these observations we present strategies that manage momentum’s volatility by advanced volatility models in calm periods and downside risk in periods when a momentum crash is likely. Compared to the Realized Volatility managed momentum strategy frequently examined in the literature, our switching strategy exhibits higher returns, significantly reduces left tail risk and provides statistically significant utility gains for mean-variance investors, CRRA investors as well as loss averse investors.
Dieser Eintrag ist Teil der Universitätsbibliographie.
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