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【Operations Research】Optimal Dynamic Momentum Strategies

2022-10-14  click:[]

Authors: Kai Li (Department of Applied Finance, Macquarie University; Institute of Financial Studies, Southwestern University of Finance and Economics), Jun Liu (Rady School of Management, University of California San Diego)


We explicitly solve for the optimal dynamic trading strategy between a riskless asset and a risky asset with momentum. The optimal portfolio weight depends not only on the momentum, as in Merton’s framework, but also on the historical price path; this contrasts with Merton. Because of their path dependence, optimal portfolio weights have a wide distribution for a given level of momentum; for example, investors may short the risky asset if it has rebound price paths but leverage if it has hump-shaped price paths. This effect tends to be the most significant after large price swings. Path dependence is solved with explicit formulas and presented with heuristic statistics.

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