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Contribution Details

Type Journal Article
Scope Discipline-based scholarship
Title Portfolio Construction with Hierarchical Momentum
Organization Unit
Authors
  • Antonello Cirulli
  • Michal Kobak
  • Urban Ulrych
Item Subtype Original Work
Refereed No
Status Published in final form
Language
  • English
Journal Title The Journal of Portfolio Management
Publisher Pageant Media
Geographical Reach international
ISSN 0095-4918
Volume 50
Number 4
Page Range 136 - 159
Date 2024
Abstract Text This article presents a portfolio construction approach that combines the hierarchical clustering of a large asset universe with the stock price momentum. On one hand, investing in high-momentum stocks enhances returns by capturing the momentum premium. On the other hand, hierarchical clustering of a high-dimensional asset universe ensures sparse diversification, stabilizes the portfolio across economic regimes, and mitigates the problem of increased drawdowns typically present in momentum portfolios. Moreover, the proposed portfolio construction approach avoids the covariance matrix inversion. An out-of-sample backtest on a non-survivorship-biased dataset of international stocks shows that, compared to the model-based and model-free benchmarks, hierarchical momentum portfolios achieve improved cumulative and risk-adjusted portfolio returns as well as decreased portfolio drawdowns net of transaction costs. The study further suggests that the unique characteristics of the hierarchical momentum portfolios arise because of both dimensionality reduction via clustering and momentum-based stock selection.
Related URLs
Digital Object Identifier 10.3905/jpm.2023.1.570
Other Identification Number merlin-id:24351
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Keywords Economics and Econometrics, Finance, General Business, Management and Accounting, Accounting
Additional Information Bereits als Working Paper in SSRN No. 4125072 erschienen: https://doi.org/10.2139/ssrn.4125072.