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Optimal Time Series Momentum

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Abstract

We develop a continuous-time asset price model to capture the time series momentum documented recently. The underlying stochastic delay differential system facilitates the analysis of effects of different time horizons used by momentum trading. By studying an optimal asset allocation problem, we find that the performance of time series momentum strategy can be significantly improved by combining with market fundamentals and timing opportunity with respect to market trend and volatility. Furthermore, the results also hold for different time horizons, the out-of-sample tests and with short-sale constraints. The outperformance of the optimal strategy is immune to market states, investor sentiment and market volatility.

Suggested Citation

  • Xue-Zhong He & Kai Li & Youwei Li, 2015. "Optimal Time Series Momentum," Research Paper Series 353, Quantitative Finance Research Centre, University of Technology, Sydney.
    • Handle: RePEc:uts:rpaper:353
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    File URL: https://www.uts.edu.au/sites/default/files/qfr-archive-03/QFR-rp353.pdf
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    References listed on IDEAS

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    Cited by:

    1. Kai Li, 2014. "Asset Price Dynamics with Heterogeneous Beliefs and Time Delays," PhD Thesis, Finance Discipline Group, UTS Business School, University of Technology, Sydney, number 13, July-Dece.

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    More about this item

    Keywords

    momentum; reversal; portfolio choice; optimality; profitability;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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