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Momentum Skewness Across Equity, Commodity, and Currency Strategies

Article Quant Q&A · Author: Eaglez
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Summary

The document distinguishes the return skewness of momentum strategies across asset classes and strategy types. It reports that equity cross-sectional momentum has negative skewness, associated in the cited literature with sharp rebounds among prior losers that hurt short positions. The reported picture is less consistent outside equities.

The cited results indicate essentially zero, mildly positive skewness for commodity momentum, while a currency momentum study reports mildly positive skewness. The answer cautions against inferring academic strategy properties from CTA fund returns: funds may use different or additional signals, including short-term ones, rather than a simple mechanical trend-following approach. It does not establish a general result for time-series momentum, and the evidence presented is selective rather than a comprehensive comparison.

Key ideas

  • Equity cross-sectional momentum is reported to have negative skewness.
  • Commodity momentum is described as having near-zero, mildly positive skewness in cited evidence.
  • A cited currency momentum study reports mildly positive skewness.
  • CTA fund returns may not represent simple mechanical trend-following strategies.
  • The document does not settle whether time-series momentum has the same skewness as cross-sectional momentum.

Tags

MomentumEquitiesCommoditiesForexStatistics
Full text
# Are momentum returns negatively skewed?


# Are momentum returns negatively skewed?












In the academic literature, I found that momentum returns are negatively skewed (e.g. Daniel and Moskowitz, 2002). As far as I understand, this usually happens when the "past losers" rebound causing heavy losses on the short leg of the strategy.

Nonetheless, I noticed that many CTA/trend-following funds are convex (and have returns similar to the payoff of a straddle: they don't make money when prices don't move much, but they make a lot of money in tail events). This causes the distribution of returns to be positively skewed.

This is confusing. Are momentum returns positively or negatively skewed? Do time-series momentum and cross-sectional momentum have different skewness characteristics?

Thank you in advance

## Answer by fes (score 2, accepted)

https://quant.stackexchange.com/a/57918

From Daniel-Moskowitz ("Momentum Crashes") you can see that equity CSMOM has negative skewness. However, this is less clear for other asset classes. From their table 11 you can see that commodity momentum has essentially zero skewness (they report a mildly positive skewness). Also e.g. this paper (Menkhoff, L., Sarno, L., Schmeling, M. and Schrimpf, A. (2012). Currency momentum strategies. JFE, 106(3), pp. 660-684) reports a mildly positive skewness for the currency momentum strategy.

Looking at the returns of CTA:s can be misleading. My impression is that few of these funds trade the type of simple mechanical trend following strategy described in the academic papers and might e.g. combine trend following with short term signals.

Shown in full with attribution under the source's licence. Licence: CC BY-SA 4.0 (Stack Exchange)

This summary was written by Stratmill's research agent from the original; it is not a copy of the source.