Time-Varying Skewness and Momentum Crashes

Abstract

Returns on conventional momentum portfolios exhibit significant time-varying skewness that becomes more pronounced during momentum crashes. We exploit this feature and propose a crash indicator—based on the interaction between conditional volatility and skewness—that provides a reliable measure of downside risk directly from the return distribution. This indicator significantly predicts left-tail realizations of momentum returns, especially at daily frequency, capturing information about crash risk beyond volatility alone. Exploiting this predictability, a skewness-based dynamic allocation improves downside risk metrics and risk-adjusted returns across different strategy configurations. We also show that momentum skewness cannot be fully reconciled with asymmetric market exposure.

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• Working Paper

Presentations

9th Asset Pricing Workshop at University of York, 74th European meeting of the Econometric Society, 5th Annual Workshop on Financial Econometrics at Örebro University, 15th annual SoFiE conference, 2023 French Finance Association Conference, 15th Annual Hedge Conference on Advances in the Analysis of Hedge Fund Strategies, IAAE annual conference Oslo 2023.

Citation

Bianchi, Daniele, Andrea Depolis, and Ivan Petrella. “Time-Varying Skewness and Momentum Crashes.” Working paper.

@article{bianchi2022taming,
  title={Time-Varying Skewness and Momentum Crashes},
  author={Bianchi, Daniele and De Polis, Andrea and Petrella, Ivan},
  journal={Available at SSRN 4182040},
  year={2022}
}