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Time Series Momentum

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What they found

Unlike cross-sectional momentum (buy the winners relative to other assets), time-series momentum asks whether each asset's own past return predicts its own future return. Across 58 liquid futures and forwards in equities, bonds, currencies, and commodities from 1985 to 2009, an asset's return over the past 12 months positively predicted its return over the next month, and a simple strategy of going long assets with positive 12-month returns and short those with negative ones produced strong, diversified returns. Returns were partly reversed after about a year, and the strategy did best in extreme market moves, resembling a long straddle.

See it drawn

Original diagrams for the ideas on this page. Illustrative, not real market data.

Payoff of a long straddle at expiryA V shape with its point at the strike and both arms rising through zero as the price moves away.Profit / loss per share08090110120Profit if the move is big enough, in either directionStrike 100Breakeven 92Breakeven 108Max loss 8 — both premiums, if it finishes at 100Underlying price at expiry
Long straddle: payoff at expiry. A 100 call and a 100 put bought together for 8 make a V. A quiet market that ends near 100 costs the whole 8; the position only turns positive once the price finishes below 92 or above 108, whichever way it goes.

What you can use

  • The simplest trend rule, 'is the 12-month return positive or negative', works across nearly every liquid futures market.
  • Trend following historically made money in the worst equity months, which is why it is used as crisis diversification.
  • Scale each position by its volatility so that no single market dominates the book.
  • Trend signals decay after roughly a year, so refresh them; do not cling to a position because it once trended.

Caveats

Managed-futures-style portfolio with dozens of markets; a single-market version is far noisier. Gross of costs, though the markets are liquid. Trend following had a long flat stretch from 2009 to 2019 that this sample largely predates.

Tags: momentum, trend-following, futures, multi-asset

Summaries are our own reading of the paper, not the authors' words. Educational only, not advice. Discuss it in Book Club.