Publication type: Working paper
Momentum strategies have produced high returns and Sharpe ratios, and strong positive alphas relative to market models and other standard factors models. However, the returns to momentum strategies are highly skewed; they experience infrequent but strong and persistent strings of negative returns. These momentum "crashes" are forecastable: they occur following market declines, when market volatility is high, and contemporaneous with market "rebounds." The low ex-ante expected returns associated with the crashes appear to result from a a conditionally high premium attached to the the option-like payoffs of the past-loser portfolios.
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