Maximum drawdown, recovery, and momentum
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arXiv
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| Format: | Preprint |
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2014
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| _version_ | 1866911885108969472 |
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| author | Choi, Jaehyung |
| author_facet | Choi, Jaehyung |
| contents | We empirically test predictability on asset price by using stock selection rules based on maximum drawdown and its consecutive recovery. In various equity markets, monthly momentum- and weekly contrarian-style portfolios constructed from these alternative selection criteria are superior not only in forecasting directions of asset prices but also in capturing cross-sectional return differentials. In monthly periods, the alternative portfolios ranked by maximum drawdown measures exhibit outperformance over other alternative momentum portfolios including traditional cumulative return-based momentum portfolios. In weekly time scales, recovery-related stock selection rules are the best ranking criteria for detecting mean-reversion. For the alternative portfolios and their ranking baskets, improved risk profiles in various reward-risk measures also imply more consistent prediction on the direction of assets in future. In the Carhart four-factor analysis, higher factor-neutral intercepts for the alternative strategies are another evidence for the robust prediction by the alternative stock selection rules. |
| format | Preprint |
| id |
arxiv_https___arxiv_org_abs_1403_8125 |
| institution | arXiv |
| publishDate | 2014 |
| record_format | arxiv |
| spellingShingle | Maximum drawdown, recovery, and momentum Choi, Jaehyung General Finance Portfolio Management Risk Management We empirically test predictability on asset price by using stock selection rules based on maximum drawdown and its consecutive recovery. In various equity markets, monthly momentum- and weekly contrarian-style portfolios constructed from these alternative selection criteria are superior not only in forecasting directions of asset prices but also in capturing cross-sectional return differentials. In monthly periods, the alternative portfolios ranked by maximum drawdown measures exhibit outperformance over other alternative momentum portfolios including traditional cumulative return-based momentum portfolios. In weekly time scales, recovery-related stock selection rules are the best ranking criteria for detecting mean-reversion. For the alternative portfolios and their ranking baskets, improved risk profiles in various reward-risk measures also imply more consistent prediction on the direction of assets in future. In the Carhart four-factor analysis, higher factor-neutral intercepts for the alternative strategies are another evidence for the robust prediction by the alternative stock selection rules. |
| title | Maximum drawdown, recovery, and momentum |
| topic | General Finance Portfolio Management Risk Management |
| url | https://arxiv.org/abs/1403.8125 |