01 Aug Learning From "The Trend is Your Friend"
Time-series momentum effect is significant across international equity and commodity markets but central bank actions in recent years have made the environment tougher.
In this article, Absolute Momentum will be used interchangeably with trend following or time series momentum. Relative Momentum will be used interchangeably with cross-sectional momentum or relative strength.
The paper shows that time-series momentum effect is significant across international equity and commodity markets. Time series momentum serves as a hedging strategy in all examined asset classes and payoffs resemble an option straddle.
Time series momentum experiences its highest gains during extreme market movements in either direction.
The paper also finds that international mutual funds have a tendency to buy instruments that have been performing well in recent months but do not systematically sell those that have been performing poorly in the same periods.
Central bank actions in recent years have made the environment tough for time-series strategies as correlations between different asset classes increased and there are fewer independent trends to benefit from.
Authors: Athina Georgopoulou, George Jiaguo Wang
Organisations: SEI Investments, Manchester Business School