Network Momentum across Asset Classes

TL;DR

This paper introduces the concept of network momentum across multiple asset classes, revealing how momentum spillover can be modeled and exploited for investment strategies using only pricing data.

Contribution

It pioneers the analysis of momentum spillover across diverse asset classes with a graph learning model and develops a profitable multi-asset network momentum strategy.

Findings

Network momentum strategy achieves a Sharpe ratio of 1.5.

Annual return of 22% after volatility scaling from 2000 to 2022.

Demonstrates effective momentum spillover modeling across 64 futures contracts.

Abstract

We investigate the concept of network momentum, a novel trading signal derived from momentum spillover across assets. Initially observed within the confines of pairwise economic and fundamental ties, such as the stock-bond connection of the same company and stocks linked through supply-demand chains, momentum spillover implies a propagation of momentum risk premium from one asset to another. The similarity of momentum risk premium, exemplified by co-movement patterns, has been spotted across multiple asset classes including commodities, equities, bonds and currencies. However, studying the network effect of momentum spillover across these classes has been challenging due to a lack of readily available common characteristics or economic ties beyond the company level. In this paper, we explore the interconnections of momentum features across a diverse range of 64 continuous future contracts spanning these four classes. We utilise a linear and interpretable graph learning model with minimal assumptions to reveal the intricacies of the momentum spillover network. By leveraging the learned networks, we construct a network momentum strategy that exhibits a Sharpe ratio of 1.5 and an annual return of 22%, after volatility scaling, from 2000 to 2022. This paper pioneers the examination of momentum spillover across multiple asset classes using only pricing data, presents a multi-asset investment strategy based on network momentum, and underscores the effectiveness of this strategy through robust empirical analysis.