Risk-Managed Momentum Outperforms
Momentum has been found to be a persistent and pervasive factor in the returns not only of stocks, but of other asset classes (including bonds, commodities and currencies). Compared with the market, value and size risk factors, momentum in equities has earned both the highest premium and the highest Sharpe ratio.
However, momentum has also experienced the worst crashes, making the strategy unappealing to investors with a strong risk aversion.
Pedro Barroso and Pedro Santa-Clara—authors of the study “Momentum Has Its Moments,” which appears in the April 2015 issue of the Journal of Financial Economics —found that the risks associated with momentum are highly variable over time and are quite predictable.
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