Short-Term Trend: A Jewel Hidden in Daily Returns

Abstract

This article examines the performance of time-series momentum strategies using daily returns for 78 futures markets across four major asset classes between January 1985 and December 2017. The authors find that the 252-day, 63-day, and 21-day momentum strategies perform similarly to the previously documented 12-month, 3-month, and 1-month momentum strategies, respectively. The performance is stronger with volatility-based position sizing, robust to implementation considerations such as a one-day gap between signal generation and execution, and persistent across asset classes and subperiods. The authors introduce a shorter duration momentum strategy with a weekly rebalancing frequency, which cannot be replicated using monthly returns. The authors find that the short-term strategy is a strong diversifier to the longer-term strategies, but the benefit may be reduced, or even completely offset, if the quality of trade execution is poor. The authors also find that the positive contribution of short-term momentum is driven by its superior diversifying characteristics rather than by the rebalancing frequency effect.

TOPICS: Factor-based models, performance measurement, portfolio construction, style investing

Key Findings

• • The authors examine the performance of time-series momentum using daily rather than monthly returns with standard lookback periods of 1, 3, and 12 months and a rebalancing period of one month.

• • They introduce a shorter duration momentum strategy with weekly rebalancing frequency.

• • The authors show that the short-term momentum strategy is a strong diversifier to the longer-term strategies but that the benefit is heavily dependent on the quality of trade execution.