Algorithmic Trading: Winning Strategies and Their Rationale

CHAPTER 6

Interday Momentum Strategies

There are four main causes of momentum:

1. For futures, the persistence of roll returns, especially of their signs.

2. The slow diffusion, analysis, and acceptance of new information.

3. The forced sales or purchases of assets of various type of funds.

4. Market manipulation by high-frequency traders.

We will be discussing trading strategies that take advantage of each cause of momentum in this and the next chapter. In particular, roll returns of futures, which featured prominently in the last chapter, will again take center stage. Myriad futures strategies can be constructed out of the persistence of the sign of roll returns.

Researchers sometimes classify momentum in asset prices into two types: time series momentum and cross-sectional momentum, just as we classified mean reversion into two corresponding types in Chapter 2 (Moskowitz, Yao, and Pedersen, 2010). Time series momentum is very simple and intuitive: past returns of a price series are positively correlated with future returns. Cross-sectional momentum refers to the relative performance of a price series in relation to other price series: a price series with returns that outperformed other price series will likely keep doing so in the future and vice versa. We will examine examples of both types in momentum in futures and stocks.

The strategies I describe in this chapter tend to hold positions for multiple days, which is why I call them “interday” momentum strategies. I will ...