The Bottom-Up Beta of Momentum
21 Pages Posted: 11 Sep 2012 Last revised: 4 Oct 2016
Date Written: November 1, 2014
Abstract
A direct measure of the cyclicality of momentum at a given point in time, its bottom-up beta with respect to the market, forecasts both the returns and the risk of the strategy. Challenging a potential risk-based explanation, a highly cyclical momentum portfolio forecasts both higher risk and lower returns for the strategy. The results show robustness out-of-sample (OOS) and controlling for other variables. One predictive regression of monthly momentum returns on its bottom-up beta produces an OOS R-square of 2.41%. This contrasts with the usual negative OOS R-squares of similar predictive regressions for the market excess return.
Keywords: Momentum, time-varying beta, momentum crashes, risk management
JEL Classification: G11, G12, G17
Suggested Citation: Suggested Citation
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