Scaling Moving Average Momentum by Recent Volatility

Summary

The document clarifies a proposed volatility adjusted moving average crossover for fixed income momentum. A shorter moving average of an index represents a more recent price level, while a longer moving average represents a smoothed longer term level. Their difference expresses momentum in price terms. The response suggests scaling that single momentum difference by a volatility estimate, rather than dividing each moving average by a separate volatility measure and subtracting the results.

It proposes recent volatility as a practical choice because volatility tends to cluster, so a 45 day estimate may help represent near term risk. The exchange offers conceptual guidance rather than a full signal specification: it does not define return construction, volatility estimation details, normalization, trading thresholds, or empirical performance. The suggested approach should therefore be treated as an interpretation of the quoted strategy description, not evidence that a particular implementation is profitable.

Key ideas

• A short moving average represents a more recent smoothed price level than a longer moving average.
• Subtracting the longer average from the shorter average expresses momentum in price terms.
• The response recommends scaling the momentum difference by one volatility estimate.
• Recent volatility may be useful because volatility tends to cluster.
• The exchange does not establish performance or specify a complete trading rule.

Tags

# volatility adjustment on momentum


# volatility adjustment on momentum












I am trying to figure out what this text means any advice is greatly appreciated.

"volatility-adjusted crossover signal where momentum is measured by comparing a short-horizon (45 days) moving average of the total return index to a longer-horizon (90 days) moving average of the total return index" Momentum Investing in Fixed Income

say I have a returns series, i compute the cumulative return (ie the index) I then compute the average of the index over 45 days and 90 days. Do I then compute the volatility of the returns (std deviation over 45 days ) and (90 days)

So then the signal is: MA_45_Index/STDEV_RET_45 - MA_90_Index/STDEV_RET_90?

## Answer by Richi Wa (score 2, accepted)

https://quant.stackexchange.com/a/37368

With the information given I would not expect that the denominators differ.

$MA_{90}$ tells you the long term price (the moving average should remove noise) while $MA_{45}$ gives you the more recent price (noise removed).

Then $M = MA_{45} - MA_{90}$ gives you momentum in terms of price level. You can downscale this momentum by using $M/\sigma$ and $\sigma$ is a measure of volatility. I would not use different $\sigma$ for $MA_{45}$ and $MA_{90}$. You would mainly look for future volatility. Due to volatiliy clustering you could use rather recent 45-days vol.

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