Alternative Investing
Time Series Momentum
May 1, 2012
Topics - Alternative Investing Trend Following
We document an asset pricing anomaly we term “time series momentum,” which is remarkably consistent across very different asset classes and markets. Specifically, we find strong positive predictability from a security’s own past returns for a set of 58 diverse futures and forward contracts that include country equity indices, currencies, commodities and sovereign bonds over more than 25 years of data.
We find that the past 12-month excess return of each instrument is a positive predictor of its future return. This time series momentum or “trend” effect persists for about a year and then partially reverses over longer horizons. These findings are robust across a number of sub-samples, look-back periods and holding periods. We find that 12-month time series momentum profits are positive not just on average across these assets, but for every asset contract we examine.
Time series momentum is related to, but different from, the phenomenon known as “momentum” in the finance literature, which is primarily cross-sectional in nature. The momentum literature focuses on the relative performance of securities in the cross section, finding that securities that recently outperformed their peers over the past 3 to 12 months continue to outperform their peers on average over the next month. Rather than focus on the relative returns of securities in the cross section, time series momentum focuses purely on a security’s own past return.
Decomposing both time series and cross-sectional momentum profits, we find that the dominant force to both strategies is significant positive auto-covariance between a security’s excess return next month and its lagged one-year return.
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This material is not research and should not be treated as research. This paper does not represent valuation judgments with respect to any financial instrument, issuer, security or sector that may be described or referenced herein and does not represent a formal or official view of AQR. The views expressed reflect the current views as of the date hereof and neither the author nor AQR undertakes to advise you of any changes in the views expressed herein.
The information contained herein is only as current as of the date indicated, and may be superseded by subsequent market events or for other reasons. Charts and graphs provided herein are for illustrative purposes only. The information in this presentation has been developed internally and/or obtained from sources believed to be reliable; however, neither AQR nor the author guarantees the accuracy, adequacy or completeness of such information. Nothing contained herein constitutes investment, legal, tax or other advice nor is it to be relied on in making an investment or other decision. There can be no assurance that an investment strategy will be successful. Historic market trends are not reliable indicators of actual future market behavior or future performance of any particular investment which may differ materially, and should not be relied upon as such. Diversification does not eliminate the risk of experiencing investment losses.
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