Practical Applications of Carry and Time-Series Momentum: A Match Made in Heaven

Abstract

<h3>Practical Applications</h3> In <b>Carry and Time-Series Momentum: <i>A Match Made in Heaven</i></b>, published in the Fall 2020 issue of <b><i>The Journal of Alternative Investments</i></b>, authors <b>Marat Molyboga, Junkai Qian</b>, and <b>Chaohua He</b> seek to determine if managers can improve the performance of momentum strategies in the futures markets by combining time-series signals with the sign of the asset’s basis (i.e., the difference between the local spot price and the futures price). Past studies indicate that managers can improve active strategies’ risk-adjusted returns by combining multiple trading signals. Since the basis is a key input for carry trades in the futures markets, it stands to reason that filtering momentum trades on the sign of the basis would improve strategy returns. The authors investigate this hypothesis across commodities, equities, fixed income, and foreign exchange futures markets. They account for transaction costs and examine the impact of early and late business cycle expansions and recessions. Among other interesting results, it turns out that the strategy performs particularly well during recessions. <b>TOPICS:</b>Portfolio construction, performance measurement, statistical methods