Journal of Risk Model Validation

The value-at-risk of time-series momentum and contrarian trading strategies

Keunbae Ahn, Jihye Park and KiHoon Hong

  • On the theoretical side, we show that passive strategies are riskier than active strategies and the relative magnitude of the VaRs of active strategies varies as the state of the market.
  • On the empirical side, we find that active strategies are more efficient than passive strategies.

This paper not only provides a theoretical model for the value-at-risk of active and passive trading strategies but also discusses the substantial implications relevant to risk management. Our results suggest that, first, passive strategies are riskier than active trading strategies based on historical returns, such as momentum and contrarian strategies. Second, momentum (contrarian) trading is riskier in a bull (bear) market. Third, the value-at-risk of momentum (contrarian) strategies has a positive relation to the absolute value of the return autocorrelation, as well as a positive (negative) relation with the state of the market. Further, momentum trading strategies give a superior risk-adjusted performance compared with other strategies in international stock markets.

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