Momentum Strategy Analysis Of Volatility Scaling

The Time Series Momentum Strategy(TSMOM)involves going long a particular security if it has positive returns in some prior period,and short the security if it has negative returns.The TSMOM strategy is determined only by a security's own past returns.Moskowitz et al(2012)found that time series momentum returns are positive for every one of the 58 contracts they examine.But Moskowitz et al(2012)uses a approach of volatility scaling while examining abnormal returns,which scales the benefits of different futures contracts with an ex ante volatility.From this point of view,this paper studies whether the time series momentum strategy produces abnormal returns,or whether the volatility scaling produces abnormal returns.Moskowitz et al(2012)article compares the abnormal returns of the cross-sectional momentum strategy before and after scaling.The cross-sectional momentum strategy refers to buy winner portfolios and sell loser portfolios based on ranking the earnings of the securities over the past 12 months.This paper explores the specific reasons for the abnormal returns of the portfolio from another perspective,compares the abnormal returns of different conditions,and the specific impact of volatility scaling on different strategies,makes an empirical analysis,and applies the specific method of volatility scaling in quantitative investment.This paper uses the weekly data of 26 futures contracts from 2010 to 2018 in the futures exchange to compare the abnormal returns of the time series momentum strategy,the buy and hold strategy and the cross-sectional momentum strategy.This paper divides the futures contract into two futures sector,compares the abnormal returns of the three strategies,and verifies whether the excess returns are related to the futures sector.Finally,this paper studies the effects of different degrees of target volatility on the abnormal returns of momentum strategies,and uses different target volatility to construct momentum strategies.The study found that in China's futures market,if only the buy and hold strategy is used,regardless of whether or not the volatility scaling is used,a significant abnormal return will not be obtained.This paper finds that there is no cross-sectional momentum in the Chinese futures market.Whether using all futures contracts or sub-sector futures contracts,indicating that China's futures market assets have a weak cross-section.In addition,this paper finds that the method of volatility scaling can make the abnormal return of the time series momentum strategy significant.Because we set the position to the target volatility/the ex ante volatility of the contract,so that low volatility assets have a higher position ratio and have higher weight in the portfolio.In the analysis of sub-sector,this paper finds that the abnormal return of the momentum strategy has nothing to do with the futures sector.Different volatility scaling will affect the size of abnormal returns.The higher target volatility will provide greater leverage and provide more abnormal returns.The significant abnormal return is due to volatility scaling rather than the momentum strategy considered by Moskowitz et al(2012).Our empirical results provide a warning about the use of momentum strategies in the futures market.Most of the researches use the volatility scaling by default,or not use the method of volatility scaling to set the combination weight.This paper proposes a new perspective,that is,the volatility scaling used in the construction of the momentum strategy.Discussing the impact of volatility scaling on momentum strategies is the innovation of this paper.The shortcoming of this paper is that the sample of futures data used in this paper is small,the number of futures contracts is insufficient,and the existing financial theory is difficult to explain the momentum effects,so this is also a problem that needs to be studied in the future.