Momentum crashes: the Australian evidence

Abstract

Previous studies report that significant alpha can be generated in various international equity markets by employing a momentum strategy — i.e. buying past winners and short selling past losers. However, the strategy sometimes crashes, generating large negative returns over one or more consecutive months. Using Australian data, this study generally confirms recent US findings that these crashes tend to occur following steep market declines and are characterised by large positive returns by the past Loser portfolio rather than large negative returns by the past Winner portfolio. This paper also identifies significant risk changes to a momentum strategy in bear markets but, unlike the US study, it does not find the strategy to exhibit option-like behaviour at the time of a momentum crash