Asset Allocation with Time Series Momentum and Reversal
51 Pages Posted: 17 Feb 2017 Last revised: 19 Feb 2017
Date Written: January 17, 2017
To capture the well documented time series momentum and reversal in asset price, we develop a continuous-time asset price model, derive the optimal investment strategy theoretically, and test the strategy empirically. We show that, by combining market fundamentals and timing opportunity with respect to market trend and volatility, the optimal strategy based on time series momentum of moving averages over short-time horizons and reversal significantly outperforms, both in-sample and out-of-sample, the S&P500 and pure strategies based on either time series momentum or reversal only. The results are robust for different time horizons, short-sale constraints, market states, investor sentiment, and market volatility.
Keywords: Momentum, reversal, optimal asset allocation, performance
JEL Classification: G12, G14, E32
Suggested Citation: Suggested Citation