Momentum strategy, momentum crashes, and risk management: an empirical research based on Chinese commodity futures market

doi:10.7523/j.ucas.2020.0049

Abstract

Abstract: This article aims to study the effectiveness of momentum strategies in Chinese commodity futures market, and after judging the existence and causes of momentum crashes, puts forward effective methods to manage the risk of momentum crashes. In this paper, considering the transaction costs, the commodity futures momentum strategy can continuously obtain significant risk-adjusted returns, and further empirical discovery of the momentum crashes phenomenon in Chinese commodity futures market. The reason of momentum crashes is that the loser portfolio has the nature of option-like is more sensitive to market portfolio volatility, which in turn leads to the crashes of momentum portfolios. In order to carry out the risk management of momentum crashes, this paper proposes to construct a dynamic weighted momentum strategy based on target condition stop to manage the risk of momentum crashes. The results show that this method effectively avoids the extreme risk brought about by momentum crashes and obtains higher momentum return and Sharpe ratio.

Key words: momentum crashes, commodity futures, risk management, Sharpe ratio

CLC Number:

F830.9

WEI Yongfeng, ZHAO Wei. Momentum strategy, momentum crashes, and risk management: an empirical research based on Chinese commodity futures market[J]. Journal of University of Chinese Academy of Sciences, 2022, 39(5): 593-614.

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