Managing the risk of momentum on the Oslo Stock Exchange

Abstract

The concept of managing the risk of momentum trading has rendered the notion of momentum portfolios more appealing to investors, as it addresses the potential for devastating losses in the aftermath of periods of financial distress. While this has been well researched on larger stock exchanges, smaller ones have thus far been largely ignored. We examine the performance of the riskmanaged momentum strategy as developed by Barroso & Santa-Clara (2015) on the Norwegian market. This involves using an estimate of momentum risk to scale exposure to the strategy, targeting constant risk over time. Maintaining constant volatility when conducting a long-short strategy reflects what real investors and hedge funds attempt to do, as opposed to maintaining constant amounts invested in the long and short legs (Barroso & Santa-Clara, 2015). Implicit in our research is a contribution to the contested hypothesis regarding the relative profitability of momentum strategies in markets with varying degrees of liquidity. We find that although managing the risk successfully ïmproves the momentum strategy’s statistical properties as promised, the momentum effect in Norway is very weak. Another caveat is that the highly predictable risk of momentum that Barroso & Santa-Clara (2015) identified on the larger stock exchanges is considerably less so on the Oslo Stock Exchange, making the strategy more difficult to implement in Norway based on ex ante information.