Momentum and Trend in Sweden: Enhancing profits and limiting downside risk by using indicators from different time horizons
Although being one of the most robust anomalies ever discovered, the momentum factor occasionally suffer big losses during market recessions periods. We apply and compare different factor models, and find that when sorting the momentum factor on prior 2-6 months it earns a higher average monthly return compared to the common sorting on prior 2-12 months. This difference however is not found to be significant, and this model still suffers from similar big downside risk. The trend factor on the other hand, by using moving averages of prices in various time horizons, earns an even higher return and significantly improves the downside risk. By examining the recession period following the 2008 financial crisis, this is evidently true. While the momentum factor along with its different sorting periods and the market all earn quite large negative monthly average returns, the trend factor has a corresponding positive return during this period. The performance of the trend factor is robust to various transaction costs, accounting for common risk factors, alternative portfolio formations and over additional stock markets.
MSc in Finance
Dari Lindahl, Alan
Master Degree Project