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Momentum and reversal strategies with low uncertainty

Author

Listed:
  • Wang, Wenhao
  • Zhang, Qingyi
  • An, Pengda
  • Cai, Feifei

Abstract

We propose augmented momentum and reversal trading strategies that incorporate considerations of market entry timing. Market entry timing is determined by two criteria: (1) low uncertainty of the model used to forecast trading return, and (2) a positive forecasted return. Utilizing daily data from the Chinese stock market, we demonstrate that while canonical momentum and reversal trading strategies typically yield negative returns and skewness, our augmented strategies consistently exhibit positive returns and skewness. Additionally, we show that implementation of the two criteria does not significantly diminish trading opportunities, with identified market entry days evenly distributed throughout the sample period.

Suggested Citation

  • Wang, Wenhao & Zhang, Qingyi & An, Pengda & Cai, Feifei, 2024. "Momentum and reversal strategies with low uncertainty," Finance Research Letters, Elsevier, vol. 68(C).
    • Handle: RePEc:eee:finlet:v:68:y:2024:i:c:s1544612324010006
    DOI: 10.1016/j.frl.2024.105970
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    References listed on IDEAS

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    More about this item

    Keywords

    Momentum trading; Reversal trading; Model (un)certainty; Market entry timing;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation

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