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Risk adjusted momentum strategies: a comparison between constant and dynamic volatility scaling approaches

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  • Fan, Minyou
  • Li, Youwei
  • Liu, Jiadong

Abstract

We compare the performance of two volatility scaling methods in momentum strategies: (i) the constant volatility scaling approach of Barroso and Santa-Clara (2015), and (ii) the dynamic volatility scaling method of Daniel and Moskowitz (2016). We perform momentum strategies based on these two approaches in a diversified portfolio consisting of 55 global liquid futures contracts, and further compare these results to the time series momentum and buy-and-hold strategies. We find that the momentum strategy based on the constant volatility scaling method is the most efficient approach with an annual return of 15.3%.

Suggested Citation

  • Fan, Minyou & Li, Youwei & Liu, Jiadong, 2017. "Risk adjusted momentum strategies: a comparison between constant and dynamic volatility scaling approaches," MPRA Paper 83510, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:83510
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    References listed on IDEAS

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    Cited by:

    1. Ahn, Jung-Hyun & Six, Pierre, 2019. "A study of first generation commodity indices: Indices based on financial diversification," Finance Research Letters, Elsevier, vol. 30(C), pages 194-200.
    2. Simarjeet Singh & Nidhi Walia, 2022. "Momentum investing: a systematic literature review and bibliometric analysis," Management Review Quarterly, Springer, vol. 72(1), pages 87-113, February.
    3. Liu, Zhenya & Lu, Shanglin & Wang, Shixuan, 2021. "Asymmetry, tail risk and time series momentum," International Review of Financial Analysis, Elsevier, vol. 78(C).
    4. Zaremba, Adam & Cakici, Nusret & Bianchi, Robert J. & Long, Huaigang, 2023. "Interest rate changes and the cross-section of global equity returns," Journal of Economic Dynamics and Control, Elsevier, vol. 147(C).
    5. Fan, Minyou & Kearney, Fearghal & Li, Youwei & Liu, Jiadong, 2022. "Momentum and the Cross-section of Stock Volatility," Journal of Economic Dynamics and Control, Elsevier, vol. 144(C).
    6. Minyou Fan & Youwei Li & Ming Liao & Jiadong Liu, 2022. "A reexamination of factor momentum: How strong is it?," The Financial Review, Eastern Finance Association, vol. 57(3), pages 585-615, August.
    7. Li, Yan & Liang, Chao & L.D. Huynh, Toan, 2022. "A new momentum measurement in the Chinese stock market," Pacific-Basin Finance Journal, Elsevier, vol. 73(C).
    8. Zhang, Wei & Wang, Pengfei & Li, Yi, 2020. "Intraday momentum in Chinese commodity futures markets," Research in International Business and Finance, Elsevier, vol. 54(C).

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    More about this item

    Keywords

    Cross-sectional momentum; Time series momentum; Momentum crashes; Volatility scaling;
    All these keywords.

    JEL classification:

    • G02 - Financial Economics - - General - - - Behavioral Finance: Underlying Principles
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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