Aqr's Momentum Funds (a)
1. What is a momentum investment strategy?
Momentum is the phenomenon that stocks which have performed well in the past will continue to perform well in the future, and that stocks which have performed poorly will continue to perform poorly. Therefore a momentum investment strategy is to invest in short term portfolios that have high returns in the past, and to short those with low returns over the same period.
2. Analyze these portfolios.
By analyzing monthly returns of all 10 portfolios from 1927-2012 and 2000-2012, we can see that there is a general pattern that stocks with higher momentum have higher return, which confirms the momentum strategy. The average return of stocks with high minus low momentum is a little lower than that of high momentum stocks, but still much higher than that of low momentum stocks: 1.19 vs. 0.32 from 1927-2012 and 0.379 vs. 0.095 from 2000-2012.
As of skewness, for the period 1927-2012, only stocks with higher momentum (group 9 and 10) are negatively skewed, indicating higher risks in these portfolios. For the period 2000-2012, portfolios 4-10 are negatively skewed, indicating that the whole market became riskier in recent years. For high minus low momentum stocks, their skewness is much lower than that of all 10 portfolios for both the whole period and recent years. This reason lies in that higher momentum brings higher risk and makes the return’s distribution more negatively skewed.
We also analyzed the kurtosis of ten portfolios in both periods and found there is a general pattern that stocks with higher momentum have lower kurtosis, and stocks with the highest momentum from 1927-2012 has a negative kurtosis. It means that the returns of higher momentum stocks are more concentrated than that of lower momentum stocks, suggesting less risk. However, the kurtosis of high minus low momentum portfolio is 15.344 and 5.26 for the two periods. It shows that returns of the portfolio formed on momentum strategy are more fluctuated
Momentum is the phenomenon that stocks which have performed well in the past will continue to perform well in the future, and that stocks which have performed poorly will continue to perform poorly. Therefore a momentum investment strategy is to invest in short term portfolios that have high returns in the past, and to short those with low returns over the same period.
2. Analyze these portfolios.
By analyzing monthly returns of all 10 portfolios from 1927-2012 and 2000-2012, we can see that there is a general pattern that stocks with higher momentum have higher return, which confirms the momentum strategy. The average return of stocks with high minus low momentum is a little lower than that of high momentum stocks, but still much higher than that of low momentum stocks: 1.19 vs. 0.32 from 1927-2012 and 0.379 vs. 0.095 from 2000-2012.
As of skewness, for the period 1927-2012, only stocks with higher momentum (group 9 and 10) are negatively skewed, indicating higher risks in these portfolios. For the period 2000-2012, portfolios 4-10 are negatively skewed, indicating that the whole market became riskier in recent years. For high minus low momentum stocks, their skewness is much lower than that of all 10 portfolios for both the whole period and recent years. This reason lies in that higher momentum brings higher risk and makes the return’s distribution more negatively skewed.
We also analyzed the kurtosis of ten portfolios in both periods and found there is a general pattern that stocks with higher momentum have lower kurtosis, and stocks with the highest momentum from 1927-2012 has a negative kurtosis. It means that the returns of higher momentum stocks are more concentrated than that of lower momentum stocks, suggesting less risk. However, the kurtosis of high minus low momentum portfolio is 15.344 and 5.26 for the two periods. It shows that returns of the portfolio formed on momentum strategy are more fluctuated