Asset Allocation with Time Series Momentum and Reversal

51 Pages Posted: 17 Feb 2017 Last revised: 19 Feb 2017

See all articles by Xuezhong He

Xuezhong He

University of Technology Sydney (UTS) - Finance Discipline Group, Business School; Financial Research Network (FIRN)

Kai Li

Macquarie Business School, Macquarie University

Youwei Li

Hull University Business School

Date Written: January 17, 2017

Abstract

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

He, Xue-Zhong 'Tony' and Li, Kai and Li, Youwei, Asset Allocation with Time Series Momentum and Reversal (January 17, 2017). Available at SSRN: https://ssrn.com/abstract=2919122 or http://dx.doi.org/10.2139/ssrn.2919122

Xue-Zhong 'Tony' He

University of Technology Sydney (UTS) - Finance Discipline Group, Business School ( email )

Haymarket
Sydney, NSW 2007
Australia

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

Kai Li (Contact Author)

Macquarie Business School, Macquarie University ( email )

Level 6 4 Eastern Road, Macquarie University
North Ryde NSW 2109
Sydney, NSW 99999
Australia
435473800 (Phone)

Youwei Li

Hull University Business School ( email )

University of Hull
Hull, HU6 7RX
United Kingdom

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