Global Asset Allocation

Use of momentum in trading across Use of momentum in trading across industry sectorsindustry sectors

Yuri KrapivinYuk Ping NgPierre OustinowJonathan SteinmetzTerence Tong

Agenda

ObjectiveObjective Implementation & MethodologyImplementation & Methodology ResultsResults ImprovementsImprovements

Objective

Develop and test a momentum based Develop and test a momentum based strategy to trade across Industry Sectorsstrategy to trade across Industry Sectors

Implementation

Data:Data: 130 S&P500 sectors130 S&P500 sectors Monthly returns from Jan 83 to Mar 00Monthly returns from Jan 83 to Mar 00

Principle:Principle: Sort according return (univariate model)Sort according return (univariate model) Form BUY and SELL portfoliosForm BUY and SELL portfolios Take new position every monthTake new position every month

Methodology - Portfolios

BUY PortfolioBUY Portfolio Top x% performers in terms of Top x% performers in terms of total total

returnreturn for periods varying between 1 for periods varying between 1 month and 1 year in the pastmonth and 1 year in the past

SELL PortfolioSELL Portfolio Worst x% performersWorst x% performers

Methodology – Trading positions

Monthly trading positions:Monthly trading positions: Long “BUY portfolio” for a period Long “BUY portfolio” for a period

varying between 1 month and 1 yearvarying between 1 month and 1 year Short “SELL portfolio” for a period Short “SELL portfolio” for a period

varying between 1 month and 1 yearvarying between 1 month and 1 year No cash investment: Short position No cash investment: Short position

finances Long positionfinances Long position

Results – Portfolio composition

Sample: Jan 84 - Dec 94Sample: Jan 84 - Dec 94 Higher total returns achieved for:Higher total returns achieved for:

Portfolios: top / bottom 5%Portfolios: top / bottom 5% Trading position (backward / forward):Trading position (backward / forward):

1/1, 12/1, 12/61/1, 12/1, 12/6Consistent across portfolio (fractile) Consistent across portfolio (fractile)

compositioncomposition

Results – Portfolio performanceIn Sample

1/1 12/6 1/1 12/6Return (%) 10.47 6.44 10.73 7.11Volatility (%) 12.23 6.53 12.70 8.77Average rank 2.00 2.08 1.92 1.83Sharpe ratio 0.86 0.99 0.84 0.81Consistency (%) 61 54 61 59

Out of Sample1/1 12/6 1/1 12/6

Return (%) 1.60 11.28 -2.51 2.03Volatility (%) 15.11 3.78 14.55 3.96Average rank 2.08 1.33 2.98 1.83Sharpe ratio 0.11 2.98 -0.17 0.51Consistency (%) 47 75 47 58

w/o knock out w/ knock out

w/o knock out w/ knock out

Annual Results 12/6 W/O Knockout

12/6 Annual Returns

-5.0%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

Results – Returns w/o KnockoutWith out Knockout 1/1

-15.00%-10.00%

-5.00%0.00%5.00%

10.00%15.00%20.00%25.00%

Jan-

84

Jan-

86

Jan-

88

Jan-

90

Jan-

92

Jan-

94

Jan-

96

Jan-

98

Results – Returns w/ KnockoutWith Knockout 1/1

-15.00%-10.00%

-5.00%0.00%5.00%

10.00%15.00%20.00%25.00%Ja

n-84

Jan-

86

Jan-

88

Jan-

90

Jan-

92

Jan-

94

Jan-

96

Jan-

98

Results

In Sample: Knock out does not substantially In Sample: Knock out does not substantially improve performanceimprove performance

Out of Sample: Knock out significantly Out of Sample: Knock out significantly decreases returns performancedecreases returns performance

Knock out should not be used in Knock out should not be used in conjunction with a momentum strategyconjunction with a momentum strategy

Theory

Momentum effect is not sector specific but Momentum effect is not sector specific but moves across sectorsmoves across sectors

A momentum based trading strategy should A momentum based trading strategy should therefore account for momentum shifting therefore account for momentum shifting across industry sectorsacross industry sectors

Improvements

Calculate market exposureCalculate market exposure Consider other time periodsConsider other time periods Extend to other asset classes and/or other Extend to other asset classes and/or other

marketsmarkets On / Off TriggerOn / Off Trigger Optimize in conjunction with other asset Optimize in conjunction with other asset

classesclasses