Weekly Research Insights

Testing New Research on Momentum Timing

Hi there. Last week, I tested research suggesting that accounting for a stock’s distance from its 52-week high can help mitigate momentum drawdowns. This is because it’s typically the most beaten-down stocks, those furthest from their highs, that end up in the short leg of momentum strategies and tend to rebound the strongest when market sentiment turns sharply positive, crushing momentum returns.

In this week’s edition of Research Insights, I revisit the idea of momentum timing. I test a research paper that was released just a few days ago. It introduces a straightforward measure of market uncertainty and uses it to time long-short equity momentum. The authors find improvements in Sharpe ratios of up to 75% compared to standard momentum.

I put the idea to the test with an empirical analysis and find significant improvements, not just over standard momentum, but also over a volatility-scaled momentum strategy. Combining the proposed uncertainty measure with volatility scaling further boosts Sharpe ratios while meaningfully reducing drawdowns.

More details below.