{"title":"Science or scientism? On the momentum illusion","authors":"Klaus Grobys","doi":"10.1007/s10436-024-00446-5","DOIUrl":null,"url":null,"abstract":"<div><p>This study explores the risk of the traditional momentum strategy in terms of its realized variance using various data frequencies. It is shown that momentum risk is <i>infinite</i> regardless of the data frequency, implying that (a) <i>t</i>-statistics for this strategy do not exist, (b) correlation-based metrics such as Sharpe ratios do not exist either, and (c) the momentum premium is <i>not</i> observable in reality. It is further shown that the time-honored lognormal distribution is unable to accurately model extreme events observed at various variance data frequencies. Finally, it is shown that the well-known <i>effect of time aggregation</i> does not work for this investment vehicle. Hence, the study is forced to conclude that momentum stories have no valid foundation for their claims.</p></div>","PeriodicalId":45289,"journal":{"name":"Annals of Finance","volume":"20 4","pages":"479 - 519"},"PeriodicalIF":0.8000,"publicationDate":"2024-07-02","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"https://link.springer.com/content/pdf/10.1007/s10436-024-00446-5.pdf","citationCount":"0","resultStr":null,"platform":"Semanticscholar","paperid":null,"PeriodicalName":"Annals of Finance","FirstCategoryId":"1085","ListUrlMain":"https://link.springer.com/article/10.1007/s10436-024-00446-5","RegionNum":0,"RegionCategory":null,"ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":null,"EPubDate":"","PubModel":"","JCR":"Q4","JCRName":"BUSINESS, FINANCE","Score":null,"Total":0}
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Abstract
This study explores the risk of the traditional momentum strategy in terms of its realized variance using various data frequencies. It is shown that momentum risk is infinite regardless of the data frequency, implying that (a) t-statistics for this strategy do not exist, (b) correlation-based metrics such as Sharpe ratios do not exist either, and (c) the momentum premium is not observable in reality. It is further shown that the time-honored lognormal distribution is unable to accurately model extreme events observed at various variance data frequencies. Finally, it is shown that the well-known effect of time aggregation does not work for this investment vehicle. Hence, the study is forced to conclude that momentum stories have no valid foundation for their claims.
期刊介绍：
Annals of Finance provides an outlet for original research in all areas of finance and its applications to other disciplines having a clear and substantive link to the general theme of finance. In particular, innovative research papers of moderate length of the highest quality in all scientific areas that are motivated by the analysis of financial problems will be considered. Annals of Finance''s scope encompasses - but is not limited to - the following areas: accounting and finance, asset pricing, banking and finance, capital markets and finance, computational finance, corporate finance, derivatives, dynamical and chaotic systems in finance, economics and finance, empirical finance, experimental finance, finance and the theory of the firm, financial econometrics, financial institutions, mathematical finance, money and finance, portfolio analysis, regulation, stochastic analysis and finance, stock market analysis, systemic risk and financial stability. Annals of Finance also publishes special issues on any topic in finance and its applications of current interest. A small section, entitled finance notes, will be devoted solely to publishing short articles – up to ten pages in length, of substantial interest in finance. Officially cited as: Ann Finance
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