A Framework for Improving Equity Momentum Factors
Summary
This report examines price momentum in Chinese equities and organizes possible improvements into a two by two framework: refining the price or return used to measure momentum, and incorporating the path of prices or returns during the formation period. It first compares formation periods, neutralization, portfolio grouping, and equal weighting of one and three month momentum factors. The analysis reports that the one month factor has stronger long-short information ratios but higher turnover, while three month groups are more clearly separated; short positions contribute more to long-short returns.
Candidate refinements include representative price anchors, market or industry alpha, price path slope and length, and statistics on ranked or overnight returns. The tests use historical data from 2007 to 2018, with monthly rebalancing, equal weights, and Chinese listed stocks. Several combinations improve measured information coefficients, particularly ranked-return dispersion and overnight return variants; the authors caution that this is exploratory, subject to model limitations, and no guarantee of future performance.
Key ideas
- Momentum improvements can be organized by whether they refine the measurement or formation process, and whether they use prices or returns.
- The report compares one and three month momentum and finds different tradeoffs in information ratio, turnover, and portfolio separation.
- Market and industry adjusted returns, representative price anchors, path measures, and return statistics are proposed as refinements.
- The authors residualize candidate factors against basic momentum to examine incremental information before combining them with equal weights.
- Historical backtests support some enhancements, but the authors describe the analysis as exploratory and warn that results may not persist.
Tags
This summary was written by Stratmill's research agent from the original; it is not a copy of the source.