{"id":40890447,"date":"2024-11-08T09:25:28","date_gmt":"2024-11-08T03:55:28","guid":{"rendered":"https:\/\/stockviz.biz\/index.php\/?p=40890447"},"modified":"2024-11-08T09:25:28","modified_gmt":"2024-11-08T03:55:28","slug":"intra-stock-correlation-and-momentum-returns","status":"publish","type":"post","link":"https:\/\/stockviz.biz\/index.php\/2024\/11\/08\/intra-stock-correlation-and-momentum-returns\/","title":{"rendered":"Intra-Stock Correlation and Momentum Returns"},"content":{"rendered":"\n<p>Vojtko, Radovan and Pauchlyov\u00e1, Margar\u00e9ta, <em>How to Improve Commodity Momentum Using Intra-Market Correlation<\/em> (<a href=\"https:\/\/ssrn.com\/abstract=4964417\">SSRN<\/a>) discusses using short-term and long-term correlations between constituents to bet on momentum and reversal.<\/p>\n\n\n\n<p>Since we are always on the lookout for strategies for reducing momentum drawdowns, we did a quick check to find out if a similar strategy can be used for long-only momentum.<\/p>\n\n\n\n<p>The rule is fairly basic. Using the <a href=\"https:\/\/stockviz.biz\/theme-eq\/D6663194-A965-4262-84F6-BB553B0B8998\">momentum portfolio<\/a> already formed, if 20-day average correlation between them is greater than 200-day average correlation, then go long, else, go to cash.<\/p>\n\n\n\n<figure class=\"wp-block-image size-large\"><img decoding=\"async\" src=\"https:\/\/github.com\/stockviz\/blog\/blob\/master\/momentum\/correlation-switch\/momentum.correlation.pre.png?raw=true\" alt=\"\" \/><\/figure>\n\n\n\n<p>Ignoring transaction costs, it looked like it avoided the brutal 2018-2019 drawdown. So, we dived a bit deeper to see if it was materially better than our <a href=\"https:\/\/stockviz.biz\/2022\/11\/28\/trending-momentum-models\/\">50-day SMA<\/a> idea.<\/p>\n\n\n\n<figure class=\"wp-block-image size-large\"><img decoding=\"async\" src=\"https:\/\/github.com\/stockviz\/blog\/blob\/master\/momentum\/correlation-switch\/momentum.correlation.sma.pre.png?raw=true\" alt=\"\" \/><\/figure>\n\n\n\n<p>Here, <strong>COR_RET<\/strong> represents using only correlations to go long\/cash, <strong>SMA_RET<\/strong> represents using only SMA, <strong>EITHER_RET<\/strong> is correlation <em>or<\/em> SMA and <strong>COMBINED_RET<\/strong> is correlations <em>and<\/em> SMA.<\/p>\n\n\n\n<p>Going long if either correlations <em>or<\/em> SMA (<strong>EITHER_RET<\/strong>) seemed to be a winning strategy. However, high transaction costs in India can turn any decent strategy into a loser in a heartbeat.<\/p>\n\n\n\n<figure class=\"wp-block-image size-large\"><img decoding=\"async\" src=\"https:\/\/github.com\/stockviz\/blog\/blob\/master\/momentum\/correlation-switch\/momentum.correlation.sma.net.pre.png?raw=true\" alt=\"\" \/><\/figure>\n\n\n\n<p>25bps in transaction costs negates most of the advantages of considering the correlation signal. However, the post-COVID data does point towards <strong>EITHER_RET<\/strong> outperforming <strong>SMA_RET<\/strong>.<\/p>\n\n\n\n<figure class=\"wp-block-image size-large\"><img decoding=\"async\" src=\"https:\/\/github.com\/stockviz\/blog\/blob\/master\/momentum\/correlation-switch\/momentum.correlation.sma.net.post.png?raw=true\" alt=\"\" \/><\/figure>\n\n\n\n<p>The biggest disappointment for us was that there was no improvement in drawdown metrics but 5% of outperformance might be worth the additional complexity.<\/p>\n\n\n\n<p>Code and charts are on <a href=\"https:\/\/github.com\/stockviz\/blog\/tree\/master\/momentum\/correlation-switch\">github<\/a>.<\/p>\n\n\n\n<p><\/p>\n","protected":false},"excerpt":{"rendered":"<p>Vojtko, Radovan and Pauchlyov\u00e1, Margar\u00e9ta, How to Improve Commodity Momentum Using Intra-Market Correlation (SSRN) discusses using short-term and long-term correlations between constituents to bet on momentum and reversal. Since we are always on the lookout for strategies for reducing momentum drawdowns, we did a quick check to find out if a similar strategy can be &hellip; <\/p>\n","protected":false},"author":2,"featured_media":2091813,"comment_status":"closed","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[3471],"tags":[3491,2761],"class_list":["post-40890447","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-investing-insight","tag-momentum","tag-quant","entry"],"_links":{"self":[{"href":"https:\/\/stockviz.biz\/index.php\/wp-json\/wp\/v2\/posts\/40890447","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/stockviz.biz\/index.php\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/stockviz.biz\/index.php\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/stockviz.biz\/index.php\/wp-json\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"https:\/\/stockviz.biz\/index.php\/wp-json\/wp\/v2\/comments?post=40890447"}],"version-history":[{"count":0,"href":"https:\/\/stockviz.biz\/index.php\/wp-json\/wp\/v2\/posts\/40890447\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/stockviz.biz\/index.php\/wp-json\/wp\/v2\/media\/2091813"}],"wp:attachment":[{"href":"https:\/\/stockviz.biz\/index.php\/wp-json\/wp\/v2\/media?parent=40890447"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/stockviz.biz\/index.php\/wp-json\/wp\/v2\/categories?post=40890447"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/stockviz.biz\/index.php\/wp-json\/wp\/v2\/tags?post=40890447"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}