Absolute Momentum strategies have the potential to generate positive returns across all interest rate environments, including a rising interest rate environment.
Trend following effects have been very stable and consistent across four asset classes (commodities, currencies, stock indexes and bonds) over the last two centuries.
Trend following can work well on stocks. Buying stocks at new all time highs and exiting them after they’ve fallen below an ATR trailing stop would have yielded a significant return on average.
No single approach of trend measurement method can systematically deliver better results across all dimensions. To determine which method is appropriate, various aspects need to be considered. These include length of measured trend, the way signal is compared and conversion of signal into position.
The paper finds positive momentum profits for the 6 different types of momentum strategies tested but these profits were only better than an equal-weighted strategy in the in-sample period.
Both Absolute and Relative Momentum can enhance returns and Absolute Momentum reduces volatility and drawdown more. Combining Absolute and Relative Momentum gives the best risk-adjusted returns.
