This post features the next Quantopian-based research presented in the paper “Uncovering Momentum” (http://ssrn.com/abstract=3502301) that extends the previous “Momentum with Volatility Timing” study with a top-bottom analysis of the strategy. In summary, below are the four outcomes outlined in the Conclusion section:
- The heterogeneous momentum behavior across market states and deciles portfolios suggests that each case can be associated with different processes and hence requires independent evaluation. The winners performance during the bull market state represents the most unblemished case for explaining the momentum effect.
- Detaching the volatility scaling component from the time series momentum portfolio identifies the momentum decile as a basic common block across conventional, time-series, and dual momentum strategies.
- Combining the in- and out-of-sample momentum decile analysis highlights the difference in performance levels between the two intervals and prompts a more asymmetrical version of the momentum definition like "achievement award for lucky winners". The small price of this award does not represent a challenge for the Efficient Market Hypothesis and defines a criterion for assessing the underlying momentum theories and models.
- The paper proposes to extend the scope of cross-section return studies with the analysis of temporal patterns by applying time series clustering.
This notebook is related to Section IV focusing on time series clustering of the in- and out-of-sample dataset. The figure below shows the means and standard deviations of in/out-of-sample monthly stock time series clustered within the ranking period.
