A Theoretical Analysis of Momentum and Value Strategies

OMI Seminar Series

We explore implications of the rational theory of momentum and reversal in Vayanos and Woolley (2011) for empirical work and portfolio management. We compute closed-form Sharpe ratios of various implementations of momentum and value strategies, of combinations of these strategies, and for general investment horizons. For plausible parameter values, the correlation between momentum and value returns is negative, momentum exhibits positive serial correlation for short lags and zero for longer lags, and value exhibits positive serial correlation for short lags and negative for longer lags. While the Sharpe ratio for momentum exceeds that of value for short horizons, the comparison can reverse for long horizons.

Location:
Speaker(s):

Dimitri Vayanos (LSE)

Date:
Tuesday, May 8, 2012 - 14:15
to 15:15