Stats › Long run returns › Momentum
Momentum and its crashes
Momentum is the simplest idea in the whole factor literature. Buy what has been going up, sell what has been going down. It shouldn't work, it's hard to explain why it would, and it has one of the strongest long run records of anything in finance.
It also has the worst crashes of anything in finance. This page puts both halves next to each other, because quoting one without the other leaves you with a completely wrong picture. The highest Sharpe ratio of the classic factors sits alongside a maximum drawdown of minus 96.69% and a single month that took away nearly three quarters of the strategy's value.
The part I find most useful is the pattern in when the crashes happen. Not in falling markets, which is where you would look for them. They come in violently rising ones, after a deep bear market, and they're driven by the losers rallying rather than the winners breaking. One warning on the figures: every number here is quoted from a specific paper, and those papers build their portfolios differently, so the same event has more than one correct magnitude. I've flagged that in the notes instead of blending them into an average that belongs to nobody.
Momentum, buying past winners and selling past losers, has produced the highest Sharpe ratio of the classic factors. Over 1926 to 2011 it returned 14.46% a year with a Sharpe ratio of 0.53, against 0.39 for the market, 0.36 for value and 0.26 for size. It also has the worst crashes. August 1932 was minus 74.36% and July 1932 minus 60.98%, a two month loss of about ninety percent. April 2009 was minus 45.52%. Both crashes happened in violently rising markets after deep bear markets, and both were driven by losers rallying rather than winners falling.
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