Δρ. Luca Del Viva
We document the existence of exploitable directional predictability in equity returns. We find that that the conditional probability of observing positive returns after a sequence of k consecutive negative (positive) returns is increasing (decreasing) with k. We propose a number of strategies to profit from this finding and compare them with momentum. We show that the proposed strategies (i) generate positive alphas and higher Sharpe ratios relative to momentum; (ii) generate positively skewed returns and have very low probability of crashes; (iii) when combined with momentum, our strategies generate substantially higher returns and Sharpe ratios; and (iv) correlate with momentum during bull markets, but substantially outperform momentum strategies in bear markets thus reducing momentum crashes.
Date: 22 October 2021 | 13:00 – 14:30