Physical approach to price momentum and its application to momentum strategy

TL;DR

This paper introduces a physics-inspired quantitative measure of price momentum and demonstrates its effectiveness in improving weekly contrarian investment strategies in South Korea and the US, outperforming traditional methods.

Contribution

It proposes a novel physical momentum concept for financial instruments and applies it to develop superior contrarian strategies that outperform traditional approaches.

Findings

Physical momentum-based strategies yield higher returns.

Strategies outperform traditional contrarian strategies.

Performance not explained by Fama-French three-factor model.

Abstract

We introduce various quantitative and mathematical definitions for price momentum of financial instruments. The price momentum is quantified with velocity and mass concepts originated from the momentum in physics. By using the physical momentum of price as a selection criterion, the weekly contrarian strategies are implemented in South Korea KOSPI 200 and US S&P 500 universes. The alternative strategies constructed by the physical momentum achieve the better expected returns and reward-risk measures than those of the traditional contrarian strategy in weekly scale. The portfolio performance is not understood by the Fama-French three-factor model.