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Optimization study of momentum investment strategies under asymmetric power-law distribution of return rate

  • Xu Wu , Kun Wang EMAIL logo , Linlin Zhang and Chong Peng
Published/Copyright: November 11, 2022
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Studies in Nonlinear Dynamics & Econometrics
From the journal Studies in Nonlinear Dynamics & Econometrics Volume 27 Issue 5

Abstract

In the context that the tails of security returns obey an asymmetric power-law distribution, this paper constructs two fractal statistical measures based on fractal theory: fractal expectation and fractal variance. Subsequently, a new momentum strategy is constructed by introducing the fractal measures into the momentum strategy as measures of returns and risks to optimize the selection criterion. Finally, the empirical results show that the new momentum strategy outperforms the traditional momentum strategy and the risk-adjusted momentum strategy, confirming the effectiveness of fractal expectation and fractal variance.

Keywords: asymmetric power-law distribution; fractal expectation; fractal variance; momentum strategy; risk-adjusted momentum strategy
Corresponding author: Kun Wang, School of Business, Chengdu University of Technology, Chengdu, China, E-mail:

Funding source: National Natural Science Foundation of China

Award Identifier / Grant number: 71903017

Funding source: National Social Science Foundation of China

Award Identifier / Grant number: 17BJY188

  1. Author contributions: All the authors have accepted responsibility for the entire content of this submitted manuscript and approved submission.

  2. Research funding: National Natural Science Foundation of China, Funder ID: https://doi.org/10.13039/501100001809 (Grant Number: 71,903,017); National Social Science Fund of China, Funder ID: https://doi.org/10.13039/501100012456 (Grant Number: 17BJY188).

  3. Conflict of interest statement: The authors declare no conflicts of interest regarding this article.

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Supplementary Material

The online version of this article offers supplementary material (https://doi.org/10.1515/snde-2022-0020).

Received: 2022-03-01
Accepted: 2022-10-18
Published Online: 2022-11-11

© 2022 Walter de Gruyter GmbH, Berlin/Boston

Articles in the same Issue

  1. Frontmatter
  2. Research Article
  3. Analysis of heterogeneous duopoly game with information asymmetry based on extrapolative mechanism
  4. Review
  5. Modelling volatility dependence with score copula models
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https://doi.org/10.1515/snde-2022-0020
Keywords for this article
asymmetric power-law distribution; fractal expectation; fractal variance; momentum strategy; risk-adjusted momentum strategy

Articles in the same Issue

  1. Frontmatter
  2. Research Article
  3. Analysis of heterogeneous duopoly game with information asymmetry based on extrapolative mechanism
  4. Review
  5. Modelling volatility dependence with score copula models
  6. Research Articles
  7. A new test for non-linear hypotheses under distributional and local parametric misspecification
  8. Optimization study of momentum investment strategies under asymmetric power-law distribution of return rate
  9. Comparison of Score-Driven Equity-Gold Portfolios During the COVID-19 Pandemic Using Model Confidence Sets
  10. Integrated variance of irregularly spaced high-frequency data: A state space approach based on pre-averaging
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