MERGING MOMENTUM -THE EFFECTS OF COMBINED CRASH MITIGATING STRATEGIES

Abstract

Momentum strategies offer tempting expected returns but suffer from occasional momentum crashes. Crash mitigating strategies, such as the Absolute momentum (Gulen and Petkova, 2018) and Extreme absolute strength momentum (Yang and Zhang, 2019), have proven effective in alleviating momentum crashes, while also offering better risk-adjusted returns compared to relative momentum strategies. We evaluate whether further improvement of absolute momentum strategies is feasible, by merging these strategies with the concept of Dynamic momentum developed by Dobrynskaya (2019). Our results suggest that absolute momentum strategies also benefit from dynamic momentum, reaping additional risk-adjusted returns, further improving these strategies, while also outperforming relative and absolute momentum strategies. Therefore, we suggest merging already existing absolute momentum strategies with the Dynamic momentum strategy is beneficial in terms of returns and the risk associated with those returns.