In this paper, we introduce performance risk/return Ratios as new criteria for the construction of the winner and loser portfolios in momentum strategies. Our results show that momentum strategies based on novel risk/return Ratio criteria applied to previous 6-month or 12-month periods, generate positive returns over 6-month and 12-month holding periods and are more profitable than strategies based on usual cumulative or total return benchmarks. We compare strategies driven by different performance Ratios and cumulative return benchmark using independent performance measures based on a coherent risk measure (expected shortfall risk) and cumulative return over the holding period. Specifically, the R-Ratio emerges in our study as the best candidate for momentum portfolio construction. Finally, we model momentum profits in a GARCH-stable setting and validate our assumptions on the winner and loser return patterns.
|Number of pages||15|
|Journal||Investment Management and Financial Innovations|
|State||Published - Jan 1 2004|
- GARCH-stable modeling
- Momentum strategies
- Risk/return Ratio criterion