Returns Signal Momentum

Abstract

A new type of momentum based on past return signs is introduced, called Returns Signal Momentum. This is mainly driven by sign dependence, which is positively related to average return and negatively related to return volatility. An empirical application using a universe of commodity and financial futures offers supporting evidence to this momentum factor. Investment strategies based on Returns Signal Momentum result in higher returns and Sharpe ratio and lower drawdown when compared to Time Series Momentum and other benchmark strategies. Overall, Returns Signal Momentum can benefit investors as an effective strategy for speculation and hedging.