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The Journal of Alternative Investments

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

Marat Molyboga, Junkai Qian and Chaohua He
The Journal of Alternative Investments Fall 2020, 23 (2) 84-93; DOI: https://doi.org/10.3905/jai.2020.1.106
Marat Molyboga
is chief risk officer and director of research at Efficient Capital Management and Adjunct Faculty at the Illinois Institute of Technology in Chicago, IL
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Junkai Qian
is a PhD candidate at the Stuart School of Business of the Illinois Institute of Technology in Chicago, IL
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Chaohua He
is an assistant professor of finance at the School of International Trade and Economics of the University of International Business and Economics in Beijing, China
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Abstract

This article introduces a novel approach to combining time-series momentum and carry trade by conditioning trading signals of time-series momentum on the sign of the basis, a key input for the carry trade. We find that this new technique applied to four major asset classes improved the Sharpe ratio of time-series momentum by approximately 0.17 net of fees. The improvement in performance is greater during recessions and, therefore, conditioning time-series momentum signals on the sign of the basis improves performance when it matters the most. Thus, the new approach has practical importance for investors and asset managers who attempt to improve their long-term performance without increasing downside risk during periods of market turbulence.

TOPICS: Analysis of individual factors/risk premia, factor-based models, style investing

Key Findings

  • • We introduce a new approach that conditions time-series momentum trading signals on the sign of the basis.

  • • Empirical analysis across the four major asset classes of equities, fixed income, currencies, and commodities shows an improvement in the Sharpe ratio of approximately 0.17 net of fees.

  • • The proposed approach is particularly relevant for investors because its performance improvement is greater during recessions.

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The Journal of Alternative Investments: 23 (2)
The Journal of Alternative Investments
Vol. 23, Issue 2
Fall 2020
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Carry and Time-Series Momentum: A Match Made in Heaven
Marat Molyboga, Junkai Qian, Chaohua He
The Journal of Alternative Investments Sep 2020, 23 (2) 84-93; DOI: 10.3905/jai.2020.1.106

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Carry and Time-Series Momentum: A Match Made in Heaven
Marat Molyboga, Junkai Qian, Chaohua He
The Journal of Alternative Investments Sep 2020, 23 (2) 84-93; DOI: 10.3905/jai.2020.1.106
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  • Article
    • Abstract
    • DATA DESCRIPTION AND SUMMARY STATISTICS
    • ENHANCING PERFORMANCE OF TSMOM WITH CARRY
    • CONCLUDING REMARKS
    • ACKNOWLEDGMENTS
    • ADDITIONAL READING
    • ENDNOTES
    • REFERENCES
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