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A guide to survival of momentum in UK style portfolios

Sarwar, G., Mateus, C. and Todorovic, N. ORCID: 0000-0003-4875-623X (2018). A guide to survival of momentum in UK style portfolios. International Journal of Banking, Accounting and Finance, 9(2), pp. 192-224. doi: 10.1504/IJBAAF.2018.092134

Abstract

In this study we estimate the survival time of momentum in six UK style portfolio returns from October 1980 to June 2014. We utilise the Kaplan-Meier estimator, a non-parametric method that measures the probability that momentum will persist beyond the present month. This probability enables us to compute the average momentum survival time for each of the six style portfolios. Discrepancies between these empirical mean survival times and those implied by theoretical models [Random Walk and ARMA (1, 1)] show that there is scope for profiting from momentum trading. We illustrate this by forming long-only, short-only and long-short trading strategies that exploit positive and negative momentum and their average survival time. These trading strategies yield considerably higher Sharpe ratios than the comparative buy-and-hold strategies at a feasible level of transaction costs. This result is most pronounced for the long/short strategies. Our findings remain robust during the 2007/2008 financial crisis and the aftermath, suggesting that Kaplan-Meier estimator is a powerful tool for designing a profitable momentum strategy.

Publication Type: Article
Additional Information: Copyright Inderscience, 2018.
Publisher Keywords: Momentum survival, Style portfolios, Kaplan-Meier estimator, Trading strategies
Subjects: H Social Sciences > HG Finance
Departments: Cass Business School > Finance
URI: http://openaccess.city.ac.uk/id/eprint/20357
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