Huseyin Gulen and Ralitsa Petkova examine a new form of momentum investing called absolute strength momentum, which classifies winners and losers using historical return thresholds rather than relative rankings. The paper argues this approach better identifies meaningful trends and may avoid some of the severe momentum crashes associated with traditional strategies.
Absolute Strength: Exploring Momentum in Stock Returns
Huseyin Gulen, Ralitsa Petkova
Research
73 Pages
Key Takeaways
Higher Risk Adjusted Returns: Absolute strength momentum generated a 2.50% monthly risk adjusted return with a 0.34 Sharpe ratio from 1965 to 2016, exceeding traditional relative momentum results.
More Stable Thresholds: Average winner and loser breakpoints remained near +64% and -43%, creating more consistent classifications than relative momentum, whose cutoffs varied substantially across market environments.
Global Evidence Found: The strategy outperformed relative momentum across four international markets, delivered 0.61% monthly profits in Japan, and achieved a 0.23 Sharpe ratio in corporate bonds.
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