01 Jan Learning From "Using Style Index Momentum to Generate Alpha"

Relative Momentum applied on Style Indexes delivered positive results.

In this article, Absolute Momentum will be used interchangeably with trend following or time series momentum. Relative Momentum will be used interchangeably with cross-sectional momentum or relative strength.

The paper explores Relative Momentum on Style Indexes. Indexes used are the Russell 2000 Growth, Russell 2000 Value, Russell Mid-Cap Growth, Russell Mid-Cap Value, Russell Top 200 Growth, Russell Top 200 Value. They analyse various formation periods to rank each of the six indexes based on their return over that period of time. For each index held they then calculated subsequent returns for various holding periods. An example would be a 24,6 portfolio, which means they ranked the style indexes based on 24 month prior performance, then held each single style index portfolio for 6 months based on its formation period performance. They rank the style indexes based on formation period performance, then buy the top performing index and short the bottom performing index.

Results are generally positive and statistically significant, especially for the shorter holding periods. Long-Short returns across various formation periods peak at 12 months of prior performance. Across various holding periods the Long-Short returns peak at 1 month. This is shown in “Exhibit 1” of the paper, reproduced below.

Source: Using Style Index Momentum to Generate Alpha

Research Paper: Using Style Index Momentum to Generate Alpha

Authors: Samuel L. Tibbs, Ph.D., CFA, Stanley G. Eakins, Ph.D., William DeShurko, CFP

Organisations: East Carolina University, 401 Advisor