Posted August 13th, 2014
Economists have long debated the risks and rewards of investing using the momentum strategy, an approach based on the belief that market trends will continue: that further gains will follow large increases in the price of a security and that declining prices will persist in declining. Now, Philip Z. Maymin, an assistant professor of Finance and Risk Engineering at the NYU Polytechnic School of Engineering, and his collaborators have shown that the exact day on which a portfolio manager chooses to begin tracking those trends has a profound impact on whether or not the strategy will ultimately be successful.
“Momentum’s Hidden Sensitivity to the Starting Day,” co-authored with Zakhar G. Maymin, head of research, and Gregg S. Fisher, chief investment officer, both at Gerstein Fisher in New York, was published in the Summer 2014 issue of the Journal of Investing, a periodical that offers analyses and investment strategies used by practitioners.
“Let’s say a portfolio manager who wants to plan buys and sells begins looking at monthly reports from past years,” Maymin explains. “He might choose to examine the period between February 12 and March 12 for several years running and base his decision on those figures. Now let’s say he examines the period between February 13 and March 13 instead. You might think that such a small change wouldn’t matter, but it does, even when taken over decades.”
Portfolio managers should thus be aware of this latent risk, Maymin writes, and he strongly encourages them to model several different time periods and average the results.
Both Zakhar Maymin and Fisher have taught classes in the Department of Finance and Risk Assessment. The full paper is available here.