Gray & Vogel: No free lunch from momentum strategies

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Gray & Vogel: No free lunch from momentum strategies

Postby grok87 » Fri Mar 15, 2013 11:04 am

...
http://papers.ssrn.com/sol3/papers.cfm? ... id=2226689
...

Asset Pricing Anomalies Hide Extreme Tail-Risk
Wesley R. Gray and Jack R. Vogel use stock data from all firms on the NYSE between 1963 and 2012 to find that long/short asset pricing anomalies such as momentum incur significant tail risk, with losses that would trigger margin calls and investor withdrawals at some point in the sample. The authors conclude that the anomalies are not anomalous at all as they represent strategies with extreme tail risk.


Not sure if this paper has been mentioned before.
cheers,
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Re: Gray & Vogel: No free lunch from momentum strategies

Postby stlutz » Fri Mar 15, 2013 11:13 am

Thanks for the link, grok. I look forward to reading the paper. As many know, I've always been skeptical of then notion of "risk premiums", but I always thought momentum would actually be an example of where the concept does make sense just from looking at a returns chart--the drawdowns from the strategy do mean that a higher overall returns makes sense. Of course, momentum is the one academic anomaly that is usually *not* considered to be risk based, so I can't win. :D
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Re: Gray & Vogel: No free lunch from momentum strategies

Postby EDN » Fri Mar 15, 2013 11:20 am

The more we learn about markets, the more we realize 2 things: there are multiple sources of expected return, and those returns are associated with additional risk.

This sure does make portfolio decisions for the future a lot easier than the old view that basically said: "you have stocks and bonds, and then literally a ton of other behaviors we have absolutely no explaination for or comment on."

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Re: Gray & Vogel: No free lunch from momentum strategies

Postby grayfox » Fri Mar 15, 2013 12:13 pm

grok87 wrote:...
http://papers.ssrn.com/sol3/papers.cfm? ... id=2226689
...

Asset Pricing Anomalies Hide Extreme Tail-Risk
Wesley R. Gray and Jack R. Vogel use stock data from all firms on the NYSE between 1963 and 2012 to find that long/short asset pricing anomalies such as momentum incur significant tail risk, with losses that would trigger margin calls and investor withdrawals at some point in the sample. The authors conclude that the anomalies are not anomalous at all as they represent strategies with extreme tail risk.


Not sure if this paper has been mentioned before.
cheers,


:thumbsup Very interesting paper. Grayfox Risk-O-Metrics has been using MaxDD as a preferred risk measure to annual SD for a few years now. It is good to see that the academic community is beginning to catch on.

BTW, in German, Vogel means "bird". So the paper is by Gray+Bird, which is not so far from Gray+Fox. Grauer Vogel, graue Fuchs, grauen Hund. All related. :thumbsup :thumbsup
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Re: Gray & Vogel: No free lunch from momentum strategies

Postby grok87 » Fri Mar 15, 2013 3:54 pm

grayfox wrote:
grok87 wrote:...
http://papers.ssrn.com/sol3/papers.cfm? ... id=2226689
...

Asset Pricing Anomalies Hide Extreme Tail-Risk
Wesley R. Gray and Jack R. Vogel use stock data from all firms on the NYSE between 1963 and 2012 to find that long/short asset pricing anomalies such as momentum incur significant tail risk, with losses that would trigger margin calls and investor withdrawals at some point in the sample. The authors conclude that the anomalies are not anomalous at all as they represent strategies with extreme tail risk.


Not sure if this paper has been mentioned before.
cheers,


:thumbsup Very interesting paper. Grayfox Risk-O-Metrics has been using MaxDD as a preferred risk measure to annual SD for a few years now. It is good to see that the academic community is beginning to catch on.

BTW, in German, Vogel means "bird". So the paper is by Gray+Bird, which is not so far from Gray+Fox. Grauer Vogel, graue Fuchs, grauen Hund. All related. :thumbsup :thumbsup

Agree. It seems strange that tail risk has not been more studied. for example the paper says
For example, none of the 11 academic studies identified in Stambaugh, Yu, and Yuan (2012) as the most pervasive academic anomaly studies, include an examination of tail-risk in their original analysis.

there's a name for the return on worst idea, an alternative to the sharp ratio which uses standard deviation. can't remember the name right now.
cheers,
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Re: Gray & Vogel: No free lunch from momentum strategies

Postby grok87 » Mon Mar 18, 2013 7:58 am

I think the name is the calmar and sterling ratios. Apparently they are used a lot for hedge funds. Some more quotes from the paper.
"...the measure is not amiable to traditional statistical analysis. However maximum drawdown does serve as a benchmark for how much an investor can lose by investing in a strategy."

So fancy that. Researchers don't like to look at maximum drawdown because it doesn't fit into their fancy statistical models. But it is arguably the thing that matters most!
Cheers,
Grok

Ps I think the word they want is amenable not amiable!
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