GBA Workbench – Momentum Algorithm

This algorithm is based on momentum.

Momentum investing is a system of buying instruments that have had high returns over the past few weeks or months, and exiting those that have had poor returns over the same period. The basic idea is that once a trend is established, it is more likely to continue in that direction than to move against the trend.

It is one of the best documented and most practiced techniques in finance although there is no consensus about why, how or even “if” it works.

Parameters for this algorithm include:

  • Lookbacks Enter one or more lookback periods in days and momentum will be calculated and summed for each instrument as the precentage return.
  • Efficiency Trend “efficiency” may be relevant to a momentum strategy. Efficiency is calculated as the absolute of the simple change in price over the efficiency lookback period divided by the sum of the daily price changes.
  • Use Efficiency “None” – no efficiency ranking will be used. “Before Ranking” – “inefficient” stocks will not be included in portfolio weightings. “After Ranking” – all instruments will be ranked but any “inefficient” stocks will not receive a weighting.
  • Efficiency Limit Enter a limit between 0 and 1. 1 is pefect efficiency. Any limit towards zero accepts an increasingly inefficient trend.
  • Efficiency Lookback Enter a lookback period for the calculation of the efficiency ratio in days
  • Maximum Long Instruments Select how concentrated the portfolio should be. Instruments are ranked in order of positive momentum and this parameter chooses to invest in the top “x” ranked stocks
  • Re-allocation Period The period at the beginning of which the portfolio will be re-weighted

In the back test below the following parameters were used:

  • Lookbacks [20, 60, 120, 240]
  • Use Efficiency Ratio None
  • Efficiency Limit 0.03
  • Efficiency Lookback 0
  • Maximum Long Instruments 8
  • Re-allocation Monthly

The portfolio:

30 US listed ETF country funds and bond mutual funds.

momentum

Stat                 Momentum    S&P
-------------------  ----------  ----------
Start                1997-06-03  1997-06-03
End                  2016-12-20  2016-12-20
Risk-free rate       0.00%       0.00%

Total Return         497.18%     287.06%
Daily Sharpe         0.69        0.45
CAGR                 9.57%       7.17%
Max Drawdown         -23.06%     -55.25%

MTD                  -0.17%      3.38%
3m                   -1.22%      6.69%
6m                   1.09%       10.17%
YTD                  3.97%       13.50%
1Y                   4.12%       15.74%
3Y (ann.)            -0.64%      9.99%
5Y (ann.)            4.65%       15.28%
10Y (ann.)           4.35%       7.06%
Since Incep. (ann.)  9.57%       7.17%

Daily Sharpe         0.69        0.45
Daily Mean (ann.)    10.25%      8.88%
Daily Vol (ann.)     14.80%      19.71%
Daily Skew           -0.38       -0.05
Daily Kurt           4.42        7.74
Best Day             5.83%       11.58%
Worst Day            -6.63%      -9.03%

Monthly Sharpe       0.72        0.52
Monthly Mean (ann.)  10.17%      7.90%
Monthly Vol (ann.)   14.08%      15.28%
Monthly Skew         0.41        -0.61
Monthly Kurt         3.83        1.05
Best Month           21.26%      10.93%
Worst Month          -16.81%     -16.79%

Yearly Sharpe        0.70        0.45
Yearly Mean          10.71%      8.20%
Yearly Vol           15.34%      18.13%
Yearly Skew          0.33        -0.97
Yearly Kurt          -0.86       0.82
Best Year            41.72%      32.39%
Worst Year           -10.22%     -37.00%

Avg. Drawdown        -3.13%      -2.37%
Avg. Drawdown Days   47.31       38.17
Avg. Up Month        3.45%       3.31%
Avg. Down Month      -2.35%      -3.74%
Win Year %           73.68%      78.95%
Win 12m %            70.98%      75.00%

 

 

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