Risk-managed time-series momentum: an emerging economy experience

Abstract

Purpose – This research study aims to design a novel risk-managed time-series momentum approach. The present study also examines the time-series momentum effect in the Indian equity market. Apart from this, the study also proposes a novel risk-managed time-series momentum approach. Design/methodology/approach – The study considers the adjusted monthly closing prices of the stocks listed on the Bombay Stock Exchange from January 1996 to December 2020 to formulate long-short portfolios. Newey–West t statistics were used to test the significance of momentum returns. The present research has considered standard risk factors, i.e. market, size and value, to evaluate the risk-adjusted performance of time-series momentum portfolios. Findings – The present research reports a substantial absolute momentum effect in the Indian equity market. However, absolute momentum strategies are exposed to occasional severe losses. The proposed time-series momentum approach not only yields 2.5 times higher return than the standard time-series momentum approach but also causes substantial enhancement in downside risks and higher-order moments. Practical implications – The study's outcomes offer valuable insights for professional investors, capital market regulators and asset management companies. Originality/value – This study is one of the pioneers attempting to test the time-series momentum effect in emerging economies. Besides, current research contributes to the escalating literature on risk-managed momentum by suggesting a novel revised time-series momentum approach.

Keywords

• Time-series momentum
• Risk-managed time-series momentum
• Indian stock market