Design and analysis of momentum trading strategies
Richard J. Martin
TL;DR
This paper analyzes the skewness characteristics of linear and nonlinear momentum trading strategies, explaining their positive skewness and term structure, and synthesizes previous work with updates.
Contribution
It provides a comprehensive description of the third-moment (skewness) properties of momentum strategies, including nonlinear transformations, with detailed explanations and updates.
Findings
Skewness is generally positive for momentum strategies.
Skewness exhibits a specific term structure.
The paper synthesizes and updates previous related research.
Abstract
We give a complete description of the third-moment (skewness) characteristics of both linear and nonlinear momentum trading strategies, the latter being understood as transformations of a normalised moving-average filter (EMA). We explain in detail why the skewness is generally positive and has a term structure. This paper is a synthesis of two papers published by the author in RISK in 2012, with some updates and comments.
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Taxonomy
TopicsStochastic processes and financial applications · Financial Markets and Investment Strategies · Complex Systems and Time Series Analysis