Momentum profits are low among stocks listed on the Pakistan Stock Exchange. We explore whether this can be improved by exploiting the predicted negative relationship between returns and volatility of momentum strategies. This relationship suggests that momentum returns increase/decrease with decrease/increase in the volatility/variance of momentum returns during the previous six months. We find that scaled momentum strategies outperform the traditional strategy in terms of higher raw returns, risk-adjusted returns and Sharpe ratios. To show the superiority of scaled momentum strategies, we bootstrap the sample 100,000 times and generate the lognormal distribution of holding-period returns for all momentum strategies. We find that the probability of negative returns for the scaled strategy declines from 39% to 8% in comparison to the traditional momentum strategy.
Momentum, Volatility scaling, Risk adjusted returns, Sharpe ratio, Holding period returns, Long-term investment, Bootstrapping
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Sadaqat, M., & Butt, H. A. (2017). Does volatility scaling improve the performance of momentum strategies in the Pakistan Stock Exchange?. Business Review, 12(1), 1-19. Retrieved from https://ir.iba.edu.pk/businessreview/vol12/iss1/1
December 21, 2020