[Research Seminar] Finance: “Taming Momentum Crashes” D. BIANCHI – Queen Mary University of London
Speaker: Daniele BIANCHI
Queen Mary University of London
Date and Location – Thursday November 16th 2023 from 14:00 to 15:30
in Lille campus (B252) and on Zoom
The returns on conventional momentum portfolios exhibit a predominantly negative, time-varying skewness which deepens during the so-called “momentum crashes”. This has important implications for the dynamics of the risk-return trade-off associated with momentum investing: the relation between the portfolio expected return and its volatility is time-varying and depends on the conditional skewness of the returns. We explore the economic value of accounting for time-varying skewness to measure momentum risk by comparing the performance of different risk-managed momentum portfolios. A dynamic, skewness-adjusted maximum Sharpe ratio strategy significantly improves upon popular volatility-scaling approaches. Finally, we show that the dynamics of skewness in momentum returns cannot be fully reconciled with an asymmetric exposure to upside and downside market risk.