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Value of the skip month for momentum strategies
Johnny Wu
posted Nov 24, 2015

The skip month is the latest month in momentum. On the time of writing (Nov 24 2015), this means that to calculate momentum, we would ignore movement from Oct 24 until Nov 24 2015.

Skip month isn't always included in timing strategies. Faber and Antonacci for instance, do not consider the concept of skip month.

Here is a demonstration of something that has already been proven academically, but may be of interest to those who are skeptical. This algorithm attempts to outperform SP500 by investing only in the best performing sectors. Essentially a momentum strategy.

First we have the highest momentum from the past 250 days.

The results seem sporadic, not consistent enough to bet money.

3 responses
Johnny Wu
Nov 24, 2015

Here is the backtest when we calculate momentum but we ignore the previous month.

Much better!

Simon Thornington
Nov 24, 2015

To my eyeball, it looks like it made a difference only prior to 2007?

Johnny Wu
Nov 24, 2015

You're right, after backtesting 2007 onwards, both momentum strategies underperform the benchmark :(

Skipping the latest month yields 53.9% while not skipping is 34.14. Still a bit better, but also worse than the benchmark.

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