01 Feb Learning From "Time Series Momentum"
There is strong positive predictability from a security’s own past returns for almost five dozen diverse futures and forward contracts that include country equity indexes, currencies, commodities and sovereign bonds over more than 25 years of data.
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 finds:
Strong positive predictability from a security’s own past returns for almost five dozen diverse futures and forward contracts that include country equity indexes, currencies, commodities and sovereign bonds over more than 25 years of data. They find that the past 12-month excess return of each instrument is a positive predictor of its future return. This time series momentum or ‘‘trend’’ effect persists for about a year and then partially reverses over longer horizons. These findings are robust across a number of subsamples, look-back periods, and holding periods.
They find that 12-month time series momentum profits are positive, not just on average across these assets, but for every asset contract examine (58 in total). Their finding of positive time series momentum that partially reverse over the long-term may be consistent with initial under-reaction and delayed over-reaction, which theories of sentiment suggest can produce these return patterns
The existence and significance of time series momentum is robust across horizons and asset classes, particularly when the look-back and holding periods are 12 months or less. In addition, they confirm that the time series momentum results are almost identical if they use the cash indexes for the stock index futures.
Research Paper: Time series momentum
Authors: Tobias J. Moskowitz, Yao Hua Ooi, Lasse Heje Pedersen
Organisations: University of Chicago Booth School of Business, AQR Capital Management, New York University, Copenhagen Business School