How Momentum Rule Performance Changes Across Volatility Regimes
Summary
The article tests whether trading rules should adapt as volatility changes, using historical volatility divided by its rolling ten-year average to classify market conditions. It compares momentum and carry rule performance across volatility groups, then considers a smoother approach that attenuates forecasts as volatility rises. Volatility estimates are shifted to avoid using future information, and the analysis draws on a broad futures universe.
The results challenge the idea that faster momentum rules are especially effective in high volatility: momentum rules generally perform worse as volatility rises, as does carry to a lesser extent. Tests of the attenuation approach show improvements for several momentum speeds, strongest among the fastest, while carry shows no statistically clear gain. These findings are exploratory and depend on the chosen volatility measure, grouping, sample, and system; the article does not establish that the adjustment will work in other markets or periods.
Key ideas
- Historical volatility relative to its long-run average can be used to define volatility regimes.
- Momentum rule performance tends to weaken in higher volatility states, including for faster rules.
- Forecast attenuation based on volatility may improve several momentum rules, particularly faster ones.
- Carry performance also varies with volatility, but attenuation results for carry are not statistically clear.
- Regime results and adjustment benefits are conditional on the sample and modeling choices.
Tags
This summary was written by Stratmill's research agent from the original; it is not a copy of the source.