More often than not, simple models outperform complicated ones. Inspired by some recent academic research that showed that linear regressions yielded better momentum performance, we did a quick backtest to check if building a linear model through recent 12 and 1/3/6-month performance and creating a portfolio using its next-month predictions made sense.
![](https://github.com/stockviz/blog/blob/master/momentum/lm%2012~1/symRetsAll.vol.png?raw=true)
Counter-intuitively, a naïve momentum strategy outperformed linear models.
This is not our first run-in with linear regressions. Our Dynamic Linear Model strategy simply regresses prices to a 45* line and ranks them based on goodness of fit.
![](https://portalvhds29z8xdrqhczq.blob.core.windows.net/wordpress/2024/03/linear-all-1024x585.png)
Most of the time, of all the different ways to skin the cat, the simplest is the best one.
Code on github.