MOMENTUM AND VALUE: SOME

LESSONS FROM RECENT EXPERIENCE

Narasimhan Jegadeesh

Goizueta Business School, Emory University

Outline

• Evidence – 1964 to 2011

• Time varying market risk

• Does hedging market risk improve performance?

• Market conditions and profitability

• When do momentum and value signals work?

• Some suggestions

Evidence

• Momentum strategy

based on past 2 to 12

months

• Value strategy based on

Book to market ratio

• Momentum much weaker

in the new millennium

• Value weaker more

recently

Momentum Value

1964-

2011 Average 8.56 4.52

Std. Dev. 15.01 10.17

Sharpe 0.57 0.44

2001-

2007 Average 2.42 9.96

Std. Dev. 20.05 10.18

Sharpe 0.12 0.98

2007-

2011 Average -1.94 -3.75

Std. Dev. 22.13 10.01

Sharpe -0.09 -0.37

Based on data from Ken French website

Issues

• Are these signals still alive?

• Yes, but use them selectively

• Time varying market risk

• Does hedging market risk improve performance?

• When do momentum and value signals work?

Momentum Profits

-40

-30

-20

-10

0

10

20

30

196401

196502

196603

196704

196805

196906

197007

197108

197209

197310

197411

197512

197701

197802

197903

198004

198105

198206

198307

198408

198509

198610

198711

198812

199001

199102

199203

199304

199405

199506

199607

199708

199809

199910

200011

200112

200301

200402

200503

200604

200705

200806

200907

201008

201109

Time-varying Momentum Beta

-2

-1.5

-1

-0.5

0

0.5

1

1.5

2

196401

196501

196601

196701

196801

196901

197001

197101

197201

197301

197401

197501

197601

197701

197801

197901

198001

198101

198201

198301

198401

198501

198601

198701

198801

198901

199001

199101

199201

199301

199401

199501

199601

199701

199801

199901

200001

200101

200201

200301

200401

200501

200601

200701

200801

200901

201001

201101

Time-varying Value Beta

-1.5

-1

-0.5

0

0.5

1

196401

196501

196601

196701

196801

196901

197001

197101

197201

197301

197401

197501

197601

197701

197801

197901

198001

198101

198201

198301

198401

198501

198601

198701

198801

198901

199001

199101

199201

199301

199401

199501

199601

199701

199801

199901

200001

200101

200201

200301

200401

200501

200601

200701

200801

200901

201001

201101

Hedged Returns

Momentum Value

Unhedged Hedged Unhedged Hedged

1964-2011 Average 8.56 8.04 4.52 5.34

Std. Dev 15.01 12.44 10.17 8.91

Sharpe 0.57 0.65 0.44 0.60

2000-2007 Average 2.42 -4.23 9.96 7.77

Std. Dev 20.05 15.41 10.18 8.49

Sharpe 0.12 -0.27 0.98 0.91

2007-2011 Average -1.94 -1.20 -3.75 -4.79

Std. Dev 22.13 16.64 10.01 9.45

Sharpe -0.09 -0.07 -0.37 -0.51

Some Observations

• The volatility of market risk hedged portfolio is about 15%

smaller than that of unhedged portfolio

• Momentum returns in this millennium is small for hedged

portfolio as well

• Does momentum still work?

Momentum Profits

-40

-30

-20

-10

0

10

20

30

196401

196502

196603

196704

196805

196906

197007

197108

197209

197310

197411

197512

197701

197802

197903

198004

198105

198206

198307

198408

198509

198610

198711

198812

199001

199102

199203

199304

199405

199506

199607

199708

199809

199910

200011

200112

200301

200402

200503

200604

200705

200806

200907

201008

201109

Market Conditions and Profitability 1) Normal vs. Bear market

Bear Market Dummy = 1 if previous 3-year market excess return <0; and =0 otherwise;

2) Lagged market volatility

Market Volatility Dummy = 1 if last month volatility in the top decile; and =0 otherwise;

Rolling 36-Month Market Excess Returns

-60

-40

-20

0

20

40

60

80

100

196401

196412

196511

196610

196709

196808

196907

197006

197105

197204

197303

197402

197501

197512

197611

197710

197809

197908

198007

198106

198205

198304

198403

198502

198601

198612

198711

198810

198909

199008

199107

199206

199305

199404

199503

199602

199701

199712

199811

199910

200009

200108

200207

200306

200405

200504

200603

200702

200801

200812

200911

201010

201109

Performance by Market Conditions - Momentum

-30

-25

-20

-15

-10

-5

0

5

10

15

20

25

Momentum - Bull Market

-40

-35

-30

-25

-20

-15

-10

-5

0

5

10

15

Momentum - Bear Market

Performance by Market Conditions:

Momentum

Momentum

Market Num. months Average Std. Dev Sharpe

1964 to 2011

Bull 426 11.69 13.58 0.86

Bear 150 -0.31 18.29 -0.02

1964 to 2000

Bull 361 12.02 12.83 0.94

Bear 83 6.44 11.94 0.54

2001 to 2006

Bull 33 5.23 20.78 0.25

Bear 39 0.04 19.66 0.00

2007 to 2011

Bull 32 14.55 12.90 1.13

Bear 28 -20.79 28.66 -0.73

Observations

• Underweight momentum signal in bear markets

• Correlation between momentum and value is -.16

• Can Value signals help in bear markets?

Performance by Market Conditions - Value

-15

-10

-5

0

5

10

15

20

196401

196510

196707

196904

197101

197210

197407

197604

197801

197910

198107

198304

198501

198610

198807

199004

199201

199310

199507

199704

199901

200010

200207

200404

200601

200710

200907

201104

Value - Bull market

-15

-10

-5

0

5

10

196401

196510

196707

196904

197101

197210

197407

197604

197801

197910

198107

198304

198501

198610

198807

199004

199201

199310

199507

199704

199901

200010

200207

200404

200601

200710

200907

201104

Value - Bear market

Performance by Market Conditions: Momentum and Value

Momentum Value

Volatility

Num.

months Average Std. Dev Sharpe Average Std. Dev Sharpe

1964 to

2011

Bull 426 11.69 13.58 0.86 4.81 9.97 0.48

Bear

150

-0.31

18.29

-0.02

3.71

10.74

0.34

1964 to

2000

Bull 361 12.02 12.83 0.94 4.77 10.15 0.47

Bear

83

6.44

11.94

0.54

4.75

10.25

0.46

2001 to

2006

Bull 33 5.23 20.78 0.25 13.06 10.82 1.21

Bear

39

0.04

19.66

0.00

7.33

9.68

0.76

2007 to

2011

Bull 32 14.55 12.90 1.13 -3.16 5.91 -0.53

Bear

28

-20.79

28.66

-0.73

-4.43

13.37

-0.33

Overweight value signals in bear markets

Market Volatility

Standard deviation computed monthly using daily returns

0

10

20

30

40

50

60

70

80

90

196401

196503

196605

196707

196809

196911

197101

197203

197305

197407

197509

197611

197801

197903

198005

198107

198209

198311

198501

198603

198705

198807

198909

199011

199201

199303

199405

199507

199609

199711

199901

200003

200105

200207

200309

200411

200601

200703

200805

200907

201009

201111

Momentum and Market Volatility

-40

-30

-20

-10

0

10

20

30

196401

196510

196707

196904

197101

197210

197407

197604

197801

197910

198107

198304

198501

198610

198807

199004

199201

199310

199507

199704

199901

200010

200207

200404

200601

200710

200907

201104

Momentum - High Volatility

-20

-15

-10

-5

0

5

10

15

20

196401

196510

196707

196904

197101

197210

197407

197604

197801

197910

198107

198304

198501

198610

198807

199004

199201

199310

199507

199704

199901

200010

200207

200404

200601

200710

200907

201104

Momentum - Low Volatility

Value and Market Volatility

-15

-10

-5

0

5

10

15

20

196401

196510

196707

196904

197101

197210

197407

197604

197801

197910

198107

198304

198501

198610

198807

199004

199201

199310

199507

199704

199901

200010

200207

200404

200601

200710

200907

201104

Value – Low Volatility

-15

-10

-5

0

5

10

196401

196510

196707

196904

197101

197210

197407

197604

197801

197910

198107

198304

198501

198610

198807

199004

199201

199310

199507

199704

199901

200010

200207

200404

200601

200710

200907

201104

Value – High Volatility

Performance by Market Volatility: Momentum and Value

Momentum Value

Volatility

Num.

months Average Std. Dev Sharpe Average Std. Dev Sharpe

1964 to

2011

Low 518 10.16 12.00 0.85 5.81 8.93 0.65

High

58

-5.72

30.79

-0.19

-6.99

17.53

-0.40

1964 to

2000

Low 419 10.63 11.72 0.91 5.23 9.19 0.57

High

25

16.87

23.83

0.71

-3.13

20.68

-0.15

2001 to

2006

Low 60 10.17 13.13 0.77 12.48 6.82 1.83

High

12

-36.36

38.81

-0.94

-2.69

20.04

-0.13

2007 to

2011

Low 39 5.15 13.32 0.39 1.79 8.76 0.20

High

21

-15.11

32.93

-0.46

-14.05

11.64

-1.21

Conclusion

• Momentum signal is strong in recent periods when bear

markets are excluded

• Underweight momentum signal and overweight value

signals in bear markets

• Overweight momentum signals in high volatility periods if

it is not a bear market