SSRN Id3407263 PDF

HEDGING MOMENTUM
KAI LI†∗ AND LE MA§

†
Macquarie Business School
Macquarie University, NSW 2109, Australia
§
UTS Business School
University of Technology Sydney, NSW 2007, Australia
kai.li@mq.edu.au, le.ma@uts.edu.au
Abstract. We assess empirically the intertemporal hedging for assets with mo-
mentum (we term it “intertemporal momentum” or IM). Consistent with the dy-
namic portfolio theory, we show that (1) IM significantly forecasts stock returns
at both market level and firm level over long horizons and complements standard
myopic momentum (MM); (2) IM strategies produce returns with a slightly lower
mean (due to the cost of hedging), much lower volatility, higher skewness (due to
the heavy penalty for very negative returns), and hence much higher Sharpe ratio
(due to the investment target), comparing with MM; (3) because our IM strategies
and static augmented MM strategies manage different risks, a simple combination
of them not only generates low volatility as our intertemporal strategies but also
high mean as static strategies, more than quadrupling Sharpe ratios of MM; (4)
the strong performance of our strategies over long investment horizons reflects the
fact that momentum depends heavily on horizons.
Key words: Momentum, intertemporal hedging, dynamic portfolio strategies.
JEL Classification: G11, G12, G17
Date: June 24, 2019.

Acknowledgement: We would like to thank Phil Dybvig, Xing Han, Tony He, Youwei Li, Jun
Liu, Terry Pan, Rossen Valkanov, Huacheng Zhang, Guofu Zhou, and Min Zhu for their helpful
comments. Financial support from the Australian Research Council (Project ID: DE180100649)
is gratefully acknowledged. All remaining errors are ours.
*Corresponding author.
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Electronic copy available at: https://ssrn.com/abstract=3407263

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1. Introduction
Momentum is one of the most prominent financial market phenomena and has
been extensively documented for a wide variety of assets.1 Most studies on momen-
tum rely on the myopic strategy that explores momentum alone and is silent on
the intertemporal hedging of Merton (1971). In this paper, we empirically study
hedging momentum that helps multiperiod investors to manage reinvestment (or
long-term) risks associated with momentum. The reinvestment risks significantly
affect momentum strategies that exhibit heavy horizon dependence resulting from
their inherent path dependence.
We base our empirical analysis on the optimal dynamic momentum portfolio the-
ory developed by Li and Liu (2018a) (LL). More specifically, LL demonstrate that a
multiperiod investor needs to explore a new momentum variable, in addition to the
standard myopic momentum (MM). The new variable provides a hedge for reinvest-
ment risk and we term it intertemporal momentum (IM). It is a weighted average
of historical returns over the look-back period with more recent returns receiving
higher weights, reflecting the fact that more recent returns predict more future re-
turns in a finite horizon for an asset with MM. The optimal dynamic momentum
portfolio reduces to the standard MM strategy, or mean-variance strategy, when
investment horizon is one time period. The momentum model of LL that specifies
instantaneous return of stocks implies that stock return over long horizons can be
forecasted by a variable very close to IM. We show that IM predicts stock returns
well at both market level and firm level and contains complementary information to
MM when forecasting long-run future returns.
A major issue affects the empirical assessment of optimal portfolio theories is
estimation risk. The literature shows that the out-of-sample (OOS) performance of
the optimal portfolio is severely affected by the estimation errors. On the one hand,
it is widely documented that the mean-variance framework of Markowitz (1952)
has very poor OOS performance due to estimation errors.2 On the other hand, Lan
(2015) shows that the estimation risks can even cause the optimal dynamic portfolio
strategies of Merton (1971) to underperform the myopic strategies on OOS.3 We
1Jegadeesh and Titman (1993) document momentum for individual U.S. stocks. This evidence
has been extended to stocks in other countries (Rouwenhorst, 1998), industry portfolios (Moskowitz
and Grinblatt, 1999), country indices (Asness, Liew and Stevens, 1997), currencies (Okunev and
White, 2003), commodities (Gorton, Hayashi and Rouwenhorst, 2013), corporate bonds (Jostova,
Nikolova, Philipov and Stahel, 2013), and exchange traded futures contracts (Moskowitz, Ooi and
Pedersen, 2012; Asness, Moskowitz and Pedersen, 2013).
2E.g., Jobson and Korkie (1980), Michaud (1989), Kan and Zhou (2007), DeMiguel, Garlappi
and Uppal (2009) and Tu and Zhou (2011), among others.

3Several approaches are developed to account for estimation error when constructing dynamic
portfolios. For example, the nonparametric approach of Brandt (1999) and the semiparametric

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develop an estimation-risk-free method to explore the optimal momentum portfolios.

Our method can not only capture the key differences between the dynamic portfolio
and the myopic portfolio, that is, the intertemporal hedging and horizon effect,
but also is immune to the estimation risks that can be substantial when studying
the cross-section of returns. In fact, our strategies even do not involve parameter
estimations and hence is not exposed to the estimation risks. Our strategies are
also easy to implement in practice. We show that our strategies produce fairly high
Sharpe ratios, consistent with the dynamic portfolio theory.
Over our sample period from December 1926 to December 2017, the standard my-
opic momentum strategy (i.e., with 12-month look-back period and 1-month invest-
ment horizon) produces monthly returns with a mean of 1.07×10−2 and a standard
deviation of 8.44×10−2 , generating an annualized Sharpe ratio of 0.32. Over this
same period, our intertemporal momentum strategy, say, with a 9-month horizon,
produces monthly returns with a mean of 0.81×10−2 and a standard deviation of
2.24×10−2 , generating an annualized Sharpe ratio of 0.82. The mean of our in-
tertemporal strategy’s returns is slightly lower than that of the myopic strategy,
reflecting the cost of hedging. Our strategy significantly reduces return volatility,
consistent with the dynamic portfolio theory. Indeed, the optimal dynamic strategy
smooths portfolio returns, reducing volatility. Our strategy more than doubles the
Sharpe ratio. This reflects the dynamic portfolio effect of Merton (1971). Indeed,
for a constant relative risk aversion (CRRA) investor as studied in LL, maximizing
the expected utility is equivalent to maximizing the squared Sharpe ratios of the
portfolio returns. In addition, the returns to our strategies do not revere in the
long-run, generating positive returns for holding period up to 3 years.
The intertemporal momentum strategies generate significantly positive risk-adjusted
returns according to the five-factor model of Fama and French (2015). More impor-
tantly, they generate much higher alpha over the investment horizon than in each
month within the horizon. Indeed, our strategies explore the reinvestment risk asso-
ciated with momentum, and the incremental risk-adjusted returns characterize the
horizon dependence resulting from the path dependence of firm returns. We show
that all monthly returns over the investment horizon as a whole characterize ad-
ditional information that cannot be captured by these monthly returns separately.
Therefore, our strategies effectively explore the intertemporal effect on which the
myopic strategies are silent.
approach of Aı̈t-Sahalia and Brandt (2001) directly study the dependence of portfolio weights on
state variables to deal with the estimation risks in implementing the optimal dynamic strategies.
However, these approaches are difficult to implement in a setting of many stocks, which is the case
studied in our paper.

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The intertemporal strategies above exploring hedging are still buy-and-hold s-

trategies. We further study dynamic rebalancing in the sense that the portfolio
weights are dynamically rebalanced over the investment horizon and capture the
time-varying relative strength between myopic and hedging demands. The rebalanc-
ing strategies can better explore the dynamic portfolio choice effects. They double
the mean, more than double the Sharpe ratio, and significantly increase skewness of
our intertemporal strategies. They more than quadruple Sharpe ratio of the myopic
momentum strategy. The rebalancing strategies not only generate significantly pos-
itive alpha according to the five-factor model of Fama and French (2015), but also
are immune to the five factors. They not only generate much lower return volatility
than the myopic momentum strategy, but also lead to significantly positive adjusted
returns relative to the myopic momentum UMD.
Our strategies significantly increase the skewness of portfolio returns relative to
static momentum strategies. For example, the return skewness of the static strategy
with holding period of 12 month is -4.14, which increases to -1.64 for our intertempo-
ral strategy with 12-month investment horizon and further increases to 1.43 for our
rebalancing strategy. This is consistent with the optimal portfolio theory. In fact,
the CRRA utility as used in LL gives heavy penalty for strongly negative returns in
very bad state while the utility gain at a good state is relative smaller. Therefore,
our intertemporal strategies tend to prevent big losses and hence increase return
skewness.
We find that the portfolio weight of our intertemporal momentum strategies differs
considerably from that of the myopic momentum strategies. The stocks that the
two strategies commonly hold each month account for, on average, only 27% of
all stocks that each strategy holds at the same time. Further, IM that acts as an
adjustment to the myopic strategy takes more effects during market crash periods.
By noting that IM reflects the path dependence, our findings imply that a winner
stock whose positive past returns appear more recently outperforms other winners,
where winners refer to the stocks with good recent relative performance measured
by MM.
The intertemporal strategies complement the current literature on cross-sectional
strategies that explore static factors rather than dynamic effect. Most momentum
strategies documented in the literature manage the “static” risk (i.e., cross firms),
generating high alpha. In contrast, our intertemporal momentum strategies man-
age the reinvestment risk (i.e., cross time), generating surprisingly low volatility
and high Sharpe ratio. Because they are developed to manage different risks, a
combination of our strategies and existing “static” strategies should feature both
advantages and hence generate both high return and low volatility simultaneously.

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We study a simple combination of our intertemporal strategy with the volatility-

scaled momentum strategy of Barroso and Santa-Clara (2015) that is developed to
avoid momentum crashes and is documented to increase the mean and skewness of
portfolio returns. We find that the augmented intertemporal momentum strategies,
say, with a 9-month horizon, generate monthly returns with a mean of 4.22×10−2
and a standard deviation of 7.30×10−2 , generating an annualized Sharpe ratio of
1.87. The augmented strategies generate much higher mean but lower volatility than
the baseline myopic strategy, and hence more than quadruple the Sharpe ratio of
the myopic strategy and double the Sharpe ratio of the volatility-scaled momentum
strategy of Barroso and Santa-Clara (2015). The augmented strategies do not suffer
from momentum crashes and generate positive skewness.
The strong performance of the intertemporal momentum strategies over long hori-
zons results from the heavy dependence of momentum on investment horizons. The
horizon dependence is much more significant for path-dependent state variables,
such as momentum. In fact, in Merton’s (1973) ICAPM, if the state variables that
relate to shifts in the investment opportunity set are Markovian (no path depen-
dence), then the cross-section of returns is completely characterized by these state
variables for any investment horizons. However, momentum involves historical in-
formation and is non-Markovian. As horizon increases, the path dependence of
momentum generates new state variables (i.e., hedging) to characterize agents’ opti-
mal portfolio as demonstrated by LL. Therefore, if momentum is a state variable of
the ICAPM, then stock returns will be characterized by different state variables for
different horizons. So the characterization of the reinvestment risk associated with
momentum is very different from that associated with “Markovian factors”.4 The
former is more sensitive to investment horizons. By optimally exploring the histori-
cal information contained in the price path, IM characterizes the horizon-dependent
reinvestment risk associated with momentum and reflects the path dependence that
is inherent with momentum.
Most studies on cross-sectional strategies focus on myopic strategies with a one-
month investment horizon. Our paper studies the horizon effect that is in line
with the dynamic portfolio theory (e.g., Merton, 1971) and is more relevant to the
general practice. For example, Atkins and Dyl (1997) show that investors hold
Nasdaq (NYSE) stocks for an average of 6.99 (4.01) years, with a median holding
period of 3.38 (2.43) years over the 15-year period from 1975 to 1989. Equity mutual
funds have a longer average holding period of 7 years, see, e.g., Sirri and Tufano
(1998). Bogle (2000) finds that the average holding period of institutional traders
4We use “Markovian” here in the sense that most factors in “the factor zoo” described in
Cochrane (2011) do not exhibit so strong path dependence as momentum; thus, these factors do
not exhibit so strong horizon dependence.

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decreases from about 5 years in 1980 to 5 months in 2009. Therefore, the multiperiod
investment problems are more important in practice than the one with a one period
horizon. Short investment horizon also suffers higher transaction costs and price
impact, especially for institutional traders.
Our paper is related to Da, Gurun and Warachka (2014) who show that exploring
historical price paths can significantly improve the standard momentum strategies
because investors are less attentive to “continuous information” than to “discrete
information” that is reflected in the price paths. Cooper, Gutierrez and Hameed
(2004) also document that momentum profitability depends on market states mea-
sured by historical market returns. Different from these studies, we explore the
historical price paths via IM by following the optimal momentum portfolio theory
of LL that is derived based merely on the assumption that stocks exhibit MM.
Our IM variable places different weights on different historical returns in the look-
back period, featuring both path dependence and horizon dependence of momentum.
Our paper differs from Novy-Marx (2012) who shows that different past returns in
the look-back period have different predictive ability for future returns. First, our
strategies are based on the empirical regularities of MM that the past 12-month
return is a positive predictor of next month return, rather than the “echo” effect
documented in Novy-Marx (2012). The weights on historical returns in our paper
are optimal for a mutiperiod momentum investor. Second, our strategies capture the
intertemporal hedging for a mutiperiod investment problem; however, Novy-Marx
(2012) studies a single-period investment problem.
The remainder of paper is organized as follows. Section 2 illustrates the intuition
of hedging momentum. Section 3 discusses hedging momentum by summarizing
the optimal dynamic momentum portfolio theory of LL and studies the return pre-
dictability by IM. Section 4 develops intertemporal momentum strategies to explore
the intertemporal effect of momentum, Section 5 compares IM with MM, Section 6
studies dynamic rebalancing strategies that dynamically rebalance portfolio weights
over the investment horizon, Section 7 provides further analysis, and Section 8 con-
cludes. Appendices include predictive regressions at market level and an optimal
dynamic momentum portfolio theory for the cross-section of stock returns.
2. Illustration of Hedging Momentum

This section provides the intuition about how IM works. The analysis throughout
the paper is based on the assumption that MM can positively forecast stock returns.
Following the literature, we define MM as the moving average of historical returns
over a look-back period of 12 months. At time 0 (today), the moving average of
past 12 months’ returns, that is, the returns at months {−11, −10, · · · , −1, 0}, can
positively forecast next month return at time 1. All these historical returns have

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equal forecasting power for next moenth return. Similarly, the future return at
month 2 can be forecasted by returns at months {−10, −9, · · · , 0, 1}; · · · ; and the
future return at month 12 can be forecasted by returns at months {0, 1, · · · , 10, 11}.
Notice that the more recent historical returns can forecast more future returns. For
example, the return at month -11 (a distant historical return) can be used to forecast
the future return only at month 1, while the return at month 0 (a recent historical
return) is useful for forecasting all future returns over the 12-month horizon. As
a result, more recent historical returns play more important roles when forecasting
future returns over long horizons. Fig. 1 illustrates the returns used to forecast
future returns.
Therefore, a multiperiod investor should use a new momentum variable that relies
more heavily on more recent historical returns to manage the reinvestment risk. In
other words, the intertemporal hedging demand of Merton (1971) should depend on
such a new variable. This is the intuition behind our development of new momentum
variables that hedge changes in future investment opportunities over long horizons.
The illustration above is based on a single asset. We will formalize the intuition
using the theory of LL in next section, and demonstrate that the results can be
simply extended to the cross-section of stock returns in Appendix B.
3. Intertemporal Hedging of Momentum

In this section, we discuss hedging momentum by summarizing the optimal dy-
namic momentum portfolio theory of LL and study return predictability by IM.
3.1. Intertemporal Hedging of Momentum. LL derive the optimal dynamic

momentum strategies. The basic assumption is that the next month return of a
risky asset with momentum depends positively and linearly on MM, i.e., a standard
moving average of historical returns over a look-back period τ . LL (Proposition
3.4) show that the optimal momentum portfolio weights at time t depend linearly
on two variables. The first variable is MM, denoted by mt . The standard myopic
momentum strategies documented in the literature only explore this variable. The
second variable is a weighted average of historical returns over the look-back period
with more weights on more recent historical returns. It is induced by intertempo-
ral hedging and we term it intertemporal momentum (IM). It reflects the essential
difference between a myopic portfolio and an intertemporal portfolio. Denote by
Z t
H dSv
mT,t = ω̂v (3.1)
t−τ Sv
the IM variable with T -month investment horizon at time t. The weight ω̂v placed
by the intertemporal hedging on the historical instantaneous return dSv /Sv depends

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on T given by5
ω̂v = ωv /ω̄, (3.2)
where

(v − t + τ )/τ 2 , v ∈ [t − τ, t − τ + T ], Z t
ωv = and ω̄ = ωv dv, (3.3)
T /τ 2 , v ∈ [t − τ + T, t], t−τ
with 0 ≤ T ≤ τ . Larger T leads mH T,t to depend more heavily on more recent

historical returns relative to mt . Especially, when T = 1 month, it reduces to mt
and hence the optimal strategies reduce to the myopic strategies, or mean-variance
strategies. MM depends only on one parameter τ , the look-back period, which is
chosen as 12 months throughout the paper by following the literature, e.g., Carhart
(1997), Moskowitz, Ooi and Pedersen (2012), and Asness, Moskowitz and Pedersen
(2013). Different from MM, mH T,t depends on one more parameter, the investment
horizon T .
The IM in (3.1) puts more weights on more recent historical returns. This is
because more recent returns predict more future returns in a finite horizon for a
momentum asset.6 To illustrate the weights placed by IM, we consider mH 12,t with
horizon T = 12 months, which will be used when forming all portfolios in our paper.
The discrete-time version of (3.3) is given by
1
ωt−12 , ωt−11 , ωt−10 , · · · , ωt−1 = ∗ 1, 2, 3, · · · , 12 ,
ω̄ (3.4)
ω̄ = 1 + 2 + 3 + · · · + 12 = 78.
Figure 2 also compares the weights placed on historical returns by the myopic mo-
mentum mt (the left panel) and intertemporal momentum mH 12,t (the middle panel).
It is worth noting that both variables are independent of other parameters in
the momentum model of LL, such as volatility, unconditional expected return, and
the coefficient of momentum. Further, it follows from (3.3) that different slopes of
the linear function over v ∈ [t − τ, t − τ + T ] (the decaying rate of the weights on
past returns) only change mH T,t multiplicatively, and hence they do not affect either
the predictive regressions or the zero-investment long-short portfolios to be studied
below. We standardize the sum of the weights ω̂ to 1 by scaling by ω̄. Therefore,
the new variable IM (mH 12,t ) does not suffer estimation risk.
5Corollary3.5 of LL shows that in a limiting case with large CRRA coefficient γ the weight
ωv of historical return dSv /Sv in the hedging demand is given by (3.3). This equation provides
a very close approximation for the general case. As shown in Section 3 of LL, the weight ωv is
approximately a linear function of v for v ∈ [t − τ, t − τ + T ] and is a constant for v ∈ [t − τ + T, t].
6We refer readers to LL for more discussions on the economics of the weights.

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3.2. Return Predictability. This subsection examines the return predictability

by IM at both market level and firm level. In fact, the momentum model of LL that
specifies instantaneous return of stocks implies that stock return over a horizon can
be forecasted by a variable very close to IM. This is also illustrated in Section 2.
Before we examine the firm-level return predictability, we first study the predictive
ability of both MM and IM variables for the aggregate stock market return. This
is consistent with LL’s theory that is based on a single risky asset. Appendix
A shows that either variable does not univariately predict excess returns over all
horizons from 1 month to 1 year, and all regressions generate negative out-of-sample
R2 s. However, the forecasting ability of MM is considerably enhanced, especially at
long horizons, in a bivariate regression with IM, leading to out-of-sample R2 up to
1.57%. For all horizons, the R2 statistic of the bivariate regression exploring both
momentum variables is greater than the sum of the R2 statistics of the univariate
regressions that use MM alone and IM alone respectively. This indicates that both
MM and IM essentially contain complementary information and should be explored
simultaneously for a multiperiod investor. Although MM are highly correlated with
IM (with correlation of 0.91 at the market level and 0.74 at the firm level), the
resulting multicollinearity in the regressions is not a significant concern because we
are primarily interested in the incremental predictive power of IM relative to MM,
not the slopes on both momentum variables.
LL study the optimal dynamic momentum portfolio with a single risky asset. In
Appendix B, we extend their theory to the cross-sectional momentum with multiple
assets. Similar to regressions (A.1)-(A.3) in Appendix A for the stock market, we
conduct the following Fama and MacBeth (1973) cross-sectional regressions with
horizon T ,
ri,t:t+T = am + bm mi,t + m
i , (3.5)
ri,t:t+T = aH + bH mH H
i,T,t + i , (3.6)
ri,t:t+T = a + b1 mi,t + b2 mH
i,T,t + i , (3.7)
where ri,t:t+T is return of firm i from t to t + T , mi,t and mH i,T,t are the standard
momentum variable and IM variable respectively for firm i. That is, mi,t is the
past 12-month cumulative return for firm i and mH i,T,t is the weighted average of the
past 12-month returns of firm i with weights (3.3). Following the cross-sectional
momentum literature, we exclude the last month return prior to portfolio formation
for both MM and IM, to remove the short-run reversals associated with bid-ask
bounce. To emphasize the complementary roles of both momentum, we do not
control for other factors.
The data cover the sample period from January 1926 through December 2017
and include all common shares with CRSP sharecode of 10 or 11. After dropping

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observations with invalid price/number of shares data, requiring at least 8 out of

12 historical monthly returns available and has available volatility measure (to be
detailed in Section 7.1), we get our final sample from December 1926 to December
2017 (1,093 months) based on which the main results of the paper are reported.
Table 1 shows that both MM and IM can significantly predict the cross-section
of returns at horizons varying from 3 month to 1 year. However, IM has better
predictive ability than MM in forecasting long term returns. More importantly, for
a given horizon T , the R2 for model (3.7) using both momentum variables is much
greater than the R2 for model (3.5) or (3.6) that uses either MM or IM alone. The
coefficients on both momentum and the t-statistics are much larger in the bivariate
regression than in each univariate regression. The cross-sectional regression results
are consistent with the market level predictive regressions, showing that the two
momentum variables essentially complement each other.
4. Intertemporal Momentum Strategies

The previous section shows that the IM variables predict stock returns well for
long horizons at both market level and firm level. In this section, we further ex-
plore their portfolio implications. An exact implementation of the optimal dynamic
momentum strategy of LL involves portfolio rebalancing over the entire investmen-
t horizon. The weights placed on past returns in (3.3) are different for different
months within the horizon. However, the optimal rebalancing rules depend heavily
on parameter estimations, especially for a multi-assets case. The literature shows
that the estimation errors lead to very poor OOS performance of the optimal port-
folios, e.g., Jobson and Korkie (1980), Kan and Zhou (2007), DeMiguel et al. (2009),
Tu and Zhou (2011), and Lan (2015). In order to avoid the estimation errors, we
do not exactly follow the optimal rebalancing rules of LL but we develop buy-and-
hold strategies by following the portfolio formation techniques in Fama and French
(1992). As to be shown below, these strategies depend on only one parameter, the
length of the look-back period. Therefore, our method can not only capture the
key feature of the dynamic portfolio, that is, the intertemporal hedging and horizon
dependence, but also is immune to the estimation risks that can be substantial when
studying the cross-section of returns. As a result, our strategies deliver remarkable
OOS performance. We will also study dynamic rebalancing strategies that involve
several more parameters.
4.1. Intertemporal Momentum Strategies Involving IM. In this subsection,

we develop strategies to explore the key features of the optimal dynamic strategies,
IM and horizon dependence. To avoid estimation risks, we construct portfolios by
following the portfolio formation techniques in Fama and French (1992). In this

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section, we use IM alone to sort stocks and form the long-short portfolios. We will
explore IM and MM jointly later in Section 5. There are three major reasons for using
IM alone. First, this variable reflects the key feature of the optimal portfolio weights
of LL that relies more heavily on recent versus distant historical returns. This
variable explores not only momentum but also intertemporal hedging. In fact, IM is
highly correlated with MM (with correlation of 0.91 at the market level and 0.74 at
the firm level), and hence it captures both momentum and intertemporal hedging.
Exploring hedging simultaneously exploits momentum as well. Second, mH 12,t can
reflect the average effect of dynamic portfolio rebalancing in the sense that the
weights it placed on past returns are proportional to the sum of all IMs with horizon
varying from 0 to its upper limit τ . To further capture the dynamic portfolio choice
effects, we also examine portfolio returns over the entire investment horizons. Third,
as shown in Table 1, IM can better forecast future returns over long horizons than
does MM; hence, we expect that the intertemporal momentum strategies involving
IM outperform the standard myopic momentum strategies involving MM. Section
5 further shows that the single sort studied is sufficiently to explore both MM and
IM.
Our portfolio differs form the standard momentum portfolio in Jegadeesh and
Titman (1993) in two ways. First, we use the IM mH i,T,t rather than the standard
momentum mi,t to sort the stocks. Second, we study the portfolio returns over its
entire investment horizon rather than studying the average returns across all “active”
portfolios at each month, in order to reflect the intertemporal hedging.7 Especially,
when investment horizon is one time period (i.e., one month in our paper), our
portfolio reduces to the standard myopic momentum strategy, or mean-variance
strategy.
Throughout this paper, we construct intertemporal momentum strategies with
different horizons using the same IM variable mH 12,t by choosing T = 12 months
in (3.1). In fact, all IM variables with different horizons can capture the common
feature of optimal portfolio weights of LL: putting more weights on more recent
7Economically, the dynamic portfolio is not optimal until the investment horizon. This is also
consistent with the practice of the fund industry. Many funds charge high fees when clients
withdraw money from the funds before maturity. Econometrically, Jegadeesh and Titman (1993)
report portfolio returns with overlapping holding periods in order to increase the power of their
tests. We report the arithmetic average return over the horizon to be comparable with the literature
of standard momentum that reports the arithmetic average return across all “active” portfolios.
In untabulated results, we find that alternatively reporting cumulative returns over the horizon
leads to higher mean than the sum of simple returns but does not significantly alter volatility.

12
historical returns. This choice facilitates the comparisons among different portfo-
lios.8 Also notice that, like the standard momentum variable, mH 12,t involves only
one parameter, the look-back period τ .
Table 2 reports the profits from the single-sorted intertemporal momentum strate-
gies. For comparison, we also report the profits for the standard myopic momentum
strategy that explores momentum alone and reflects the underlying model assump-
tion that MM predicts linearly and positively the next month return. We will study
later the standard momentum strategies with longer holding periods that also par-
tially reflect hedging (even not in an optimal way).
Several observations follow Table 2. First, the intertemporal momentum strategies
generate large Sharpe ratios for multiple holding periods, consistent with the optimal
dynamic portfolio theories showing that maximizing the expected CRRA utility is
equivalent to maximizing sum of squared Sharpe ratios.9 The annualized Sharpe
ratios of the intertemporal momentum strategies with holding periods of six to
twelve months are over 0.60, double Sharpe ratio of myopic momentum strategy
that explores momentum alone.
Second, there is a low cost of hedging in the sense that exploring hedging slightly
decreases portfolio return. The factor-risk-adjusted returns for the intertemporal
momentum strategies are comparable to that for the myopic momentum strategy.10
Although both the alphas and Sharpe ratios are considered as risk-adjusted returns,
the former is adjusted by the risks characterized by factors (i.e., cross firms) and the
latter features IM that explores reinvestment risk (i.e., cross time). So our results
complement current literature on cross-sectional strategies that mainly explore static
factors rather than dynamic effect.
Our results show that hedging is not to time market (hence not significantly
improves mean), but it works as momentum insurance so as to significantly reduce
return volatility and maximize Sharpe ratios. Further, the first series correlation
of returns and squared returns are 0.77 and 0.76 respectively for our intertemporal
momentum with 12-month horizon, comparing with 0.03 and 0.16 respectively for
myopic momentum with 12-month holding period. This shows that, by effectively
exploring hedging, our intertemporal strategy avoids both large losses and large
profits, leading to return persistence. This is consistent with the dynamic portfolio
theory which shows that the optimal strategy smooths portfolio returns and hence
8Weexpect that it would generate better portfolio performance to use the horizon-adjusted IM
variables for holding periods other than 12 months given that these variables allows extra flexibility.
9LL show that the value function for the optimal dynamic momentum strategies depends only
on the Sharpe ratios of the portfolio returns when the investor has CRRA utility. Under certain
probability measure, the value function equals the expected exponential function of the sum of
squared Sharpe ratios over the investment horizon.
10The US Fama-French three and five factors are downloaded from Ken French Data Library.

13
reduces volatility. Further, Hendricks, Patel and Zeckhauser (1993) show that there
is short-run persistence in mutual fund performance, which is probably related to
the long average holding period of stocks for institutional traders (varying from 5
months to 7 years), e.g., Sirri and Tufano (1998) and Bogle (2000).
Third, exploring intertemporal hedging slightly increases return skewness, even
though the skewness is still negative. According to the optimal portfolio theory, the
CRRA utility as used by LL gives heavy penalty for strongly negative returns in
very bad state while the utility gain at a good state is relative smaller. Therefore,
our intertemporal strategies tend to prevent big losses and hence increase return
skewness.
Fourth, our intertemporal momentum strategies do not revere in the long-run. In
contrast, the myopic momentum strategies are widely documented to yield negative
returns for long holding periods (over one years).11 This result is intuitive: the
profits for long holding periods are due to intertemporal hedging. Ideally, an optimal
dynamic momentum strategy always yields positive risk-adjusted expected returns
for any investment horizons. The IM with 12-month investment horizon used to
construct prtfolios reflects the common feature of IMs with different horizons and
explores intertemporal hedging, generating positive returns over long horizons.
In all, our intertemporal momentum strategies emphasize the importance of both
intertemporal hedging and investment horizons, on which the myopic strategies are
silent.
5. Comparisons between IM and MM

In this section, we compare the intertemporal momentum strategies with the
standard myopic momentum strategies and study how intertemporal momentum
adds to standard momentum.
5.1. Isolating IM from MM. To investigate how intertemporal hedging adds

to momentum strategies, this subsection develops double-sorts strategies to isolate
intertemporal momentum from standard momentum.
The optimal portfolio weights are a weighted average of MM and IM (Merton,
1971 and LL). Accordingly, we explore MM and IM jointly in this section. Notice
that IM is highly correlated with MM and hence exploring IM also explores MM
simultaneously. In order to isolate the hedging, we construct an adjusted intertem-
poral momentum variable IM⊥ = mH 12,t − mt , i.e., the difference between the two
⊥
momentum variables. IM places negative weights on more distant returns and
11Conrad and Yavuz (2017) further show that stocks that, in the standard static momentum
portfolios, contribute to momentum profits do not experience significant subsequent reversals but
stocks that do not contribute to momentum profits exhibit subsequent reversals.

14
positive weights on more recent returns. That is,

⊥ ⊥ ⊥ ⊥

ωt−12 , ωt−11 , ωt−10 , · · · , ωt−1 = − 5, −4, −3, −2, −1, 0, 1, 2, 3, 4, 5, 6 , (5.1)
where we do not normalize the sum of weights to one because normalization does not
affect the long-short portfolios. The weights are also illustrated in the right panel
of Figure 2. Like MM and IM, we exclude the last month return prior to portfolio
formation for IM⊥ . IM⊥ is “orthogonal” to MM in the sense that their correlation is
only 0.007 at the firm level. Because the optimal momentum portfolio of LL depends
linearly on MM and IM, it also depends linearly on MM and IM⊥ . Also IM⊥ does
not affect the significance of the cross-sectional regressions (3.6)-(3.7). Therefore,
we can explore both momentum and intertemporal hedging by alternatively using
MM and IM⊥ . Interestingly, IM⊥ is opposite to the echo effect of Novy-Marx (2012)
that weighs more on returns 12 to seven months prior to portfolio formation and
weighs less on more recent returns.
To explore the joint effect of both momentum, we form double-sorted portfolios
sequentially that first condition on MM, then IM⊥ . Specifically, we sort stocks
into quintiles according to their MM and then subdivide these quintiles into IM⊥
subportfolios (into 2 groups).12 Post-formation returns of longing the stocks with
highest MM and IM⊥ and shorting the stocks with lowest MM and IM⊥ over the next
three months to five years are then computed. Again, we study portfolio returns
over its entire horizon.
Table 5 Panel A reports the double-sorted portfolio returns. The double-sort
portfolios have very similar performance to the corresponding single-sort portfolios
documented in Section 4.1.13 As a robustness test, Panel B reports the momentum
profits from independent double-sorts on MM and IM⊥ . These results suggest that
IM in the single sort in Section 4.1 can explore both momentum and hedging at
the same time, and the two variables in the double sorts explores momentum and
hedging respectively.
In general, double sorts are employed to control/mitigate the effect of the single-
sort variable on the other variable. Because the first-sort variable is orthogonal to
the second-sort variable in our case (with correlation of only 0.007), the single sort
studied in Section 4.1 is therefore sufficiently to explore both MM and IM. Further,
both the double sorts and the standard momentum strategies involve MM; thus, the
12In
untabulated results, we find very similar results when we sort stocks into quintiles according
to their MM and then subdivide these quintiles into 5 groups of IM⊥ subportfolios, or sort stocks
into two groups according to MM and then subdivide them into 5 groups of IM⊥ subportfolios.
Similarly, we find that our single-sort results also do not alter when we sort stocks into 25 groups.
13We also examine our double-sort strategy adjusted by volatility using (7.1)-(7.2), where r
IM
is the double-sort momentum return. Table 3 Panel B reports the results that are also similar to
the results for the augmented single-sort portfolios studied in Section 7.1.

15
double sorts provide a perfect situation to examine how intertemporal momentum

adds to standard momentum.
5.2. Portfolio Weights Comparison. The standard momentum strategies can

be considered as sorting stocks into two groups according to their MM and then
subdividing each group into 5 MM subportfolios. Therefore, the portfolio difference
between the double sorts and standard momentum lies in the second sort: the former
uses IM⊥ but the latter uses MM again. At each month, we calculate the number
of overlapping stocks in the long legs of both portfolios. The average ratio of this
number to the number of stocks in the long legs is 0.28. Similarly, we find the
average ratios of overlapping stocks in the short legs and in the portfolios are 0.26
and 0.27 respectively. This suggests that the two portfolios are very different.
Fig. 3 illustrates the overlapping ratios. The lower panel plots the ratios for
the portfolios (the average between the ratios for the long legs and for the short
legs). It shows that overlapping ratios reduce during some market crash periods,
such as in Great Depression in 1930s, the “Nifty Fifty” episode between the late
1960s and early 1970s, the Internet bubble of the late 1990s/early 2000s. and the
global financial crashes around 2008. In other words, IM acts as an adjustment to
the myopic strategy and it takes more effects during extreme markets.
The upper panel and the middle panel show that the overlapping ratios have
different patterns for both legs. One ratio tends to increase when the other ratio
decreases. Further, we conduct the following regressions
ORtl = 0.29 − 1.07 × M V OLt + M
t
V OL,l
, ORts = 0.25 + 2.09 × M V OLt + M
t
V OL,s
,
(−1.81) (3.78)
where ORl and ORs are the overlapping ratios for the long legs and short legs
respectively and M V OL is the monthly market volatility. They show that the ratio
for the long legs decreases with market volatility but the ratio for the short legs
increases with market volatility. Therefore, as market volatility increases, the two
strategies tend to short the same stocks but long very different stocks.
Similarly, the following regressions also show the different patterns in both legs:
ORtl = 0.28 − 0.0063 × SEN Tt + SEN
t
T,l
, ORts = 0.28 + 0.0162 × SEN Tt + SEN
t
T,s
,
(−1.13) (2.54)
ORtl = 0.27 + 0.0130 × ST ATt + ST
t
AT,l
, ORts = 0.27 − 0.0216 × ST ATt + ST
t
AT,s
,
(1.67) (−3.10)
where SEN T is the investor sentiment of Baker and Wurgler (2006) and ST AT is
the market state defined as past three-year market return by following Cooper et al.
(2004).

16
5.3. Performance Comparison. Table 5 Panel C reports the portfolio returns

from single-sort involving MM deciles where the portfolio returns are the average
returns across all active portfolios. By comparing with Panel A, the intertemporal
momentum strategies generates higher mean, lower volatility, higher skewness, and
hence much higher Sharpe ratio than the standard momentum strategies.
Notice that the intertemporal hedging is jointly explored by using both IM and
the over-horizon returns. The former captures the fact that more recent historical
returns forecast more future returns as illustrated in Section 2, and the latter is due
to the dynamic portfolio choice effects where the portfolio is not optimal until hold-
ing to the horizon. To further isolate their contributions to the profits, Panel D also
reports the portfolio returns from single-sort involving MM deciles where the port-
folio returns refer to the returns over the whole horizon. The comparison between
Panel A and Panel D essentially shows that IM outperforms MM when forecasting
long-run returns. This is also consistent with the cross-sectional regression results
reported in Table 1. Therefore, the dynamic portfolio choice effects should be jointly
explored by IM and the horizon dependence.
In untabulated results, we find that our intertemporal momentum strategies have
significantly positive loading on the momentum factor (UMD). First, this confirms
that our strategies explore momentum. Second, our strategies are based on the
optimal dynamic portfolio theory that aims to improve Sharpe ratio but does not
target on alpha. Therefore, our strategies generate much higher Sharpe ratio than
standard momentum as we shown in the paper. As discussed before, although both
alpha and Sharpe ratio are considered as risk-adjusted returns, the former is adjusted
by the risks characterized by static factors (i.e., cross firms) and the latter is adjusted
by the cross-time risks that are explored by IM. So our results complement current
literature on cross-sectional strategies that mainly explore static factors rather than
the dynamic effect.
6. Dynamic Portfolio Rebalancing

To further explore the dynamic portfolio effects, we study the following strategy,
which we term “rebalancing strategy”. We study only 12-month horizon. At month
t, we construct a strategy as follow. We first sort stocks into 5 groups involving
MM. We assign a number ω1 to the first quintile stocks with the highest MM, and,
similarly, also assign a number ωj for quintile j, where j = 2, 3, 4, 5. We then sort
all stocks into 10 groups using an adjusted momentum
M Mi + ωj IMi⊥ ,
where MMi and IM⊥i represent the standard momentum and adjusted intertemporal
momentum for firm i respectively and ωj is the assigned number to quintile j (j =

17
1, 2, 3, 4, 5), to which stock i belongs. We form a portfolio by longing the top decile
stocks with the highest adjusted momentum and shorting the bottom decile stocks.
This reflects the fact that the relative weight of hedging demand to myopic demand in
the optimal portfolio depends on the level of momentum. This portfolio’s monthly
return is realized at month t + 1. At month t + 1 we do not use the portfolio
constructed at month t but construct a new portfolio using the same method at
month t except that ω = (ω1 , · · · , ω5 ) is replaced by ω ∗ 11/12. This portfolio’s
monthly return is realized at month t + 2. Similarly, at time t + 2 we construct a
new portfolio with ω ∗ 10/12; · · · ; and at month t + 11 we construct a new portfolio
with ω ∗ 1/12 realizing return at month t + 12. Therefore, over the holding period
of 12 months, we have 12 monthly portfolio returns. The average of the 12 returns
is just the return to the strategy starts at month t. Similarly, we have one strategy
starting at each month and all these strategies lead to a time series of returns. The
rebalancing strategy features the dynamic portfolio choice effect in the sense that the
portfolio is continuously rebalanced over the investment horizon. As time increases
approaching the investment horizon, the portfolio weights converge to the myopic
strategy (e.g., Merton, 1973).
Table 7 reports the returns to the rebalancing strategies. We first study four ω’s
with equal weights. This is equivalent to assume that the relative level of hedging
demand to the myopic demand is independent of firms’ momentum level. Several
observations follows from the comparison with the results for sequential double-sorts
involving MM and IM⊥ with 12-month horizon reported in Table 5 Panel A. First,
the rebalancing strategies double the mean, slightly reduce the volatility, and hence
more than double the Sharpe ratio. Second, rebalance also significantly increases
skewness. The skewness becomes higher for higher weight ω. The skewness increases
from -1.92 for the double-sort strategy to 1.43 for the rebalancing strategy with
ω = (1, 1, 1, 1, 1). The results are robust to different weighting schemes.
We also choose a weighting scheme ω = (0.5, 0.4, 0.3, 0.2, 0.1). That is, we assign
more weight to groups with higher momentum. Table 7 shows that rebalance further
improves the Sharpe ratios. The Sharpe ratio becomes 2.01 and the skewness is -
0.00.
Panels B, C, and D report the risk-adjusted returns according to the three-factor
model of Fama and French (1993), the five-factor model of Fama and French (2015),
and the myopic momentum (UMD). The rebalancing strategies not only generate
significantly positive alpha according to the five-factor model of Fama and French
(2015), but also are immune to the five factors. They not only generate much lower
return volatility than the myopic momentum strategy, but also lead to significantly
positive adjusted returns relative to the myopic momentum measured by UMD.

18
7. Further Analysis
7.1. Augmented Intertemporal Momentum Strategies. Our intertemporal
momentum strategies manage the risk in the long-run (i.e., cross time), rather than
the “static” risk studied in most of the literature (i.e., cross firms), e.g., factor mod-
els. So our results complement current literature on cross-sectional strategies that
only explore static factors rather than dynamic effect. This further implies that
a combination of our strategies and existing static strategies should significantly
improve the portfolio performance because they manage different risks.
Recently, Daniel and Moskowitz (2016) document momentum crashes that make
the momentum strategies less appealing to investors. An important development
of recent momentum literature is to eliminate the momentum crashes e.g., Barroso
and Santa-Clara (2015), Daniel and Moskowitz (2016), Gulen and Petkova (2018),
Daniel, Jagannathan and Kim (2019), and Huang, Zhang, Zhou and Zhu (2019),
among others. We do not study the combination of our strategies with each of
these augmented momentum strategies. Instead, we focus on the volatility-scaled
strategy developed in Barroso and Santa-Clara (2015) who show that the risk of
myopic momentum is highly predictable and simply scaling the long-short portfolio
by its realized volatility can eliminate momentum crashes.
Following Barroso and Santa-Clara (2015), we study volatility-scaled intertempo-
ral momentum strategies. Let {rIM,t }Tt=1 be the monthly returns of intertemporal
momentum, and {rIM,d }D T
d=1 and {dt }t=1 be the daily returns and the time series
of the dates of the last trading sessions of each month respectively. The variance
forecast of the intertemporal momentum strategy at month t is given by
125
X
2
σ̂IM,t = 21 rIM,dt−1 −j /126, (7.1)
j=0
by using daily returns in the previous six months. We use the forecasted variance
to scale the returns:
σtarget
rIM ∗ ,t = 2 rIM,,t , (7.2)
σ̂IM,t
where rIM,,t is our (unscaled) intertemporal momentum, rIM ∗ ,t is the scaled in-
tertemporal momentum, and σtarget is a constant corresponding to the target level
of volatility. We use a target corresponding to an annualized volatility of 12%.
The above volatility-scaled method follows exactly Barroso and Santa-Clara (2015)
except that we replace the standard momentum by our intertemporal momentum.
We first study the single-sort portfolio. That is, rIM in (7.1)-(7.2) is the single-sort
intertemporal momentum return documented in Subsection 4.1. Table 3 Panel A
reports the results. First, scaling volatility further increases the skewness of portfolio
returns. For example, the skewness increases from -3.35 for the standard momentum

19
to -1.64 for our unscaled intertemporal strategy with 12-month horizon, and further
increases to 0.30 after scaling volatility. The skewness becomes even higher for large
horizons. Therefore, the augmented strategies can significantly alleviate momentum
crashes, consistent with Barroso and Santa-Clara (2015). However, our strategies
generate much higher skewness than Barroso and Santa-Clara (2015)’s volatility-
scaled strategy that leads to return skewness of -0.42.
Second, the combined strategies realize much higher returns. For example, the
mean increases from 0.61% for unscaled intertemporal strategy with 12-month hori-
zon to 3.43% for the scaled strategy. Although scaling volatility also increases return
volatility, the volatilities are still lower than that of the standard myopic strategies.
As a result, the combined strategies generate even higher Sharpe ratios, more than
quadrupling the Sharpe ratio of the standard momentum and double the Sharpe
ratio of the volatility-scaled strategy in Barroso and Santa-Clara (2015).
Therefore, the combined strategies feature both hedging that generates large
Sharpe ratios and “static” risk managing that increases mean and skewness. The
results further confirm that our intertemporal momentum strategies and the static
augmented momentum strategies explore very different risks, and hence they com-
plement each other.
7.2. Risk Exposure over the Investment Horizon. In this subsection, we s-

tudy the factor loadings on the five-factor model of Fama and French (2015) for
the intertemporal momentum strategies. Panel A of Table 4 reports the results by
regressing our T -month returns for the strategy with horizon of T on the average
factors across the corresponding T months for the five factors of Fama and French
(2015). To anatomize the relationship over the 12-month horizon, we consider the
strategy with horizon of 12 month. Panel B reports the results of “breaking down”
the 12-month returns. That is, we first split each 12-month return generated by an
intertemporal momentum portfolio constructed at a certain month into 12 month-
ly returns, namely the return generated by the portfolio during the first month of
the horizon, the return generated during the second month, · · · , during the twelve
month. We call the time series of monthly returns that is generated by all portfolios
during the first month of the horizon the 1st-month returns, and call the monthly
return series generated by each portfolio during the sth month the sth-month re-
turns. We regress the sth-month returns on the monthly five factors. We also report
the results for the pooled regression of all 12 time series.
Panel A shows that our strategies generate significantly positive risk-factor ad-
justed returns. More importantly, the risk-adjusted return for the strategy with
12-month horizon is 1.20×10−2 , and the average alpha across all the 12 “shadow”
portfolio return in each month is only 0.85×10−2 . In addition, the t-statistic of

20
alpha for the strategy over the 12-month horizon is 8.40 that is much higher than
the t-statistic of alpha for the strategy return in each month. Therefore, the port-
folio returns over the entire horizon generate extra risk-adjusted returns relative to
the portfolios returns in each month within the investment horizon. In fact, our
strategies explore the reinvestment risk associated with momentum, leading to ab-
normal risk-adjusted returns that reflect the path dependence of firm returns over
long horizons. The 12-month returns as a whole captures more information during
the 12-month investment horizon.
Panel A also shows that our strategies significantly load on the market and val-
ue factors but do not significantly load on the other three factors. However, the
strategy return in each month is insensitive to the market factor in Panel B. This
suggests again that our intertemporal momentum strategy is beyond myopic mo-
mentum by also exploring the horizon dependence of momentum. The returns over
multiple periods also capture the serial correlations of the returns. In this sense, our
strategy is not exploring the static market factor itself but to some extent exploring
the structure of it, i.e., the dynamics of the market factor. As shown in Appen-
dix A, although the myopic momentum effect is insignificant for the market, the
intertemporal momentum does significantly predict market returns in the long-run.
The term structure of the loadings on the profitability and investment factors over
the horizon also shows that the 12 monthly portfolio returns as a whole is different
from the return in each month. In untabulated results, we find the same patterns
for 3-, 6-, and 9-month investment horizons.
Theoretically, many factor models have justified as empirical applications of the
ICAPM of Merton (1973), e.g., Fama (1991) and Fama and French (1993, 2015). In
the ICAPM, the state variables relate to shifts in the investment opportunity set
and their predictive ability results from “hedging” risk factors (reinvestment risk). If
those state variables are Markovian, then Merton (1973) shows that the cross-section
of returns is completely characterized by these “original state variables” independent
of investment horizons. However, momentum involves historical information and is
non-Markovian. As horizon increases, the path-dependence of momentum generates
new state variables (hedging) that characterize the agents’ optimal portfolio and
hence the equilibrium, as demonstrated by Li and Liu (2018a, 2018b). Therefore,
if (standard) momentum is a state variable of the ICAPM framework, or a risk
factor, then stock returns will be characterized by different sets of state variables
(i.e., hedging) for different horizons. In other words, the cross-section of returns
with long horizons will be characterized by intertemporal momentum, even though
it can be still characterized by other Markovian factors.

21
7.3. Across Time Versus Across Portfolios. In the previous section, to be in

line with the optimal dynamic portfolio theory of Merton (1971), we refer a strategy
return to the return realized over the entire horizon of T for a portfolio, namely the
average return across all T holding periods for a portfolio. To show that the low
return volatility documented is not due to the averaging, we study an alternative
way in calculating returns: a strategy return in each month represents the average
return across all T “active” portfolios in that month, namely the returns on the
portfolios that are constructed in last month as well as in the previous T − 1 month-
s. This alternative averaging is widely used in the literature, e.g., Jegadeesh and
Titman (1993) and Moskowitz et al. (2012). Notice that both our “across time”
averaging method and the alternative “across portfolio” averaging method generate
a single time series of monthly returns even if the holding period T is more than one
month, and both lead to the same data size of strategy returns without overlapping
observations.
Table 6 reports the strategy returns calculated using the alternative method by
averaging across all active portfolios at each month.14 By comparing with Tables 2
and 5, the alternative method as employed in the literature leads to the same mean
but more than doubles volatilities, halving Sharpe ratios.
The alternative method also leads to much lower return skewness. For example,
the skewness of our strategies with horizon of 12 months is -1.64 for the single sort,
which becomes -3.10 for the alternative method. This is consistent with the optimal
portfolio theory. In fact, the CRRA utility as used by LL gives heavy penalty for
strongly negative returns in very bad state while the utility gain at a good state
is relative small. Therefore, our intertemporal strategies tend to prevent big losses
and hence increase return skewness. In all, the dynamic portfolio effect plays a very
important role in strategy performance for long horizons.
By comparing Table 6 and Panel C of Table 5, the intertemporal strategies involv-
ing IM still outperform the strategies involving MM for long horizons, even though
we calculate strategy returns using the alternative method that does not account
for the horizon effect.
8. Conclusion
While momentum has been extensively documented in the literature, most s-
tudies rely on the myopic strategy that explores momentum alone and is silent on
the intertemporal hedging of Merton (1971). In this paper, we develop a practical
method of hedging momentum by directly exploring the intertemporal momentum
14The alternative averaging suffers look-ahead bias when dealing with missing data because, in
order to be comparable with our “across time” averaging, the averaging weights when calculating
long/short leg return depend on the number of months data availability in next T months.

22
(IM) variables induced by intertemporal hedging. Hedging momentum helps multi-

period investors to manage long-term risks that are more significant for momentum
than for most factors because momentum exhibits heavier horizon dependence that
results from the inherent path dependence of momentum.
Consistent with the dynamic portfolio theory, we show that (1) IM significantly
forecasts stock returns at both market level and firm level over long horizons and
complements standard myopic momentum; (2) intertemporal momentum strategies
that explore IM produce returns with a slightly lower mean (due to the cost of
hedging), much lower volatility, higher skewness (due to the heavy penalty for very
negative returns), and hence much higher Sharpe ratio, comparing with standard
momentum; (3) because our intertemporal strategies and static augmented mo-
mentum strategies manage different risks, a simple combination of them not only
generates low volatility as our intertemporal strategies but also high mean as static
strategies, more than quadrupling Sharpe ratios of standard momentum; (4) the
strong performance of our strategies over long horizons reflects the fact that mo-
mentum depends much more heavily on horizons than most risk factors do.

23
Appendix A. Market Return Predictability by MM and IM

To examine the return forecasting power of hedging demand in the long-run, we
conduct the following predictive regressions with horizon T ,
rt:t+T = am + bm mt + t+1 , (A.1)

rt:t+T = aH + bH mH
T,t + t+1 , (A.2)
rt:t+T = a + b1 mt + b2 mH
T,t + t+1 , (A.3)
where rt:t+T is the T -month ahead excess return from t to t + T .

Table A.1 reports the results for both in-sample and out-of-sample predictive re-
gressions of different horizons using the US stock market data from 1871 to 2017.15
All the standard errors are adjusted for heteroskedasticity and serial correlation
according to Newey and West (1987). We evaluate the out-of-sample (OOS) fore-
2
casting performance using the first 20% data as training sample and report ROS
statistic defined in Welch and Goyal (2008) and Campbell and Thompson (2008),
which measures the proportional reduction in the mean squared forecast error for
the predictive regression forecast relative to the historical average benchmark.
There are several observations from Table 1. First, Panel A (B) shows that both
MM and IM variables does not univariately predict excess returns over all horizons
from 1 month to 1 year, indicated by the small levels of in-sample t-statistics and R2
statistics, and the negative out-of-sample R2 s. However, the IM predicts the equity
premiums for different horizons better than MM, consistent with the cross-sectional
regressions results in Section 3.2.
Second, Panel C shows that the forecasting ability of MM is considerably en-
hanced, at long horizons, in a bivariate regression (A.3) with IM. Especially, the
our-of-sample R2 s for future 6-, 9- and 12-month excess returns are 1.57%, 1.48%
and 1.21% respectively, much greater than the 0.5% benchmark of Campbell and
Thompson (2008). This result is consistent with the optimal dynamic portfolio
derived in LL, showing that a long-run investor should explore both momentum
variables simultaneously.16
15The S&P 500 data during January 1927-December 2015 is from Center for Research in Security
Press (CRSP) and the S&P 500 data prior to January 1927 from Robert Shiller’s Web site. The
risk-free rate from 1920 to 2017 is the Treasury-bill rate and the risk-free rate prior to the 1920s
is estimated using the commercial paper rates by following Welch and Goyal (2008). The excess
return is the difference between the log return on the S&P 500 (dividend included) and the log
return on a risk-free bill.
16Although the predictability for excess returns of traditional macroeconomic variables has been
found to be stronger at longer horizons (see, among many others, Campbell and Shiller, 1988a,
1988b, Cochrane, 1992, and Ang and Bekaert, 2007), MM or IM variable as a single predictor has
insignificant forecasting power for long-run excess returns. Therefore, the strong predictability at

24
More importantly, by comparing Panels A-B with Panel C, for any given horizon
T , the R2 statistic for model (A.3) exploring both momentum variables is greater
than the sum of the R2 statistics for models (A.1) and (A.2) which use MM variable
alone and hedging momentum variable alone respectively. This observation holds
for both in-sample and our-of-sample R2 s, and becomes more significant for longer
horizons. This indicates that both MM and IM variables essentially contain comple-
mentary information and must be explored simultaneously for a long-run investor.
In addition, the coefficients on both momentum are much larger in the bivariate re-
gression than in the univariate regressions, suggesting that the univariate regression
with longer horizons suffers from an omitted variable bias that lowers the marginal
impact of both momentum on expected excess returns.17
Both myopic and intertemporal momentum variables are highly correlated with
correlations greater than 0.9. However, they capture different sets of historical
information, as shown in Table A.1 and the cross-sectional results in the body. In
addition, multicollinearity is not an issue for model (A.3) because both regression
coefficients are significant and have the opposite signs, implying very different roles
of the two variables.
Appendix B. Optimal Dynamic Cross-Sectional Momentum

Strategies
This section provides theoretical support for the intertemporal momentum strate-
gies studied in the paper.
We assume that momentum can forecast the cross-section of stock returns:
dRi,t = (α + βmi,t )dt + σi dBi,t , i = 1, 2, · · · , N, (B.1)
where dRi,t is stock i’s return over [t, t + dt], α and β are constants that are the
same across all stocks, σi is stock i’s return volatility assumed to be a constant,
dBi,t is zero-mean unforecastable noise (a standard Brownian motion), and mi,t is
the standard myopic momentum variable for stock i, that is, an equally-weighted
moving average of the historical returns of stock i over a look-back period. In
continuous time, it is given by
1 t
Z
mi,t = dRi,v , (B.2)
τ t−τ
longer horizons of model (A.3) is generated by the joint impact of both MM and IM variables, as
implied by the optimal dynamic momentum strategy of LL.
17In addition, Panel C also shows that b < 0 and b > 0, implying that the historical returns
1 2
over [t − τ, t − τ + T ] ([t − τ + T, t]) negatively (positively) forecast the long-run return, while the
past returns overall positively forecast the long-run return (b1 + b2 > 0). In all, Table 1 shows that
exploring the weights on historical returns play an very important role in momentum trading over
long horizons.

25
where the interval [t − τ, t] is the look-back period for momentum and τ > 0 is the
length of the look-back period. We assume that dBi,t is independent of dBj,t for
i 6= j.
The predictive model of (B.1) is an extension of the single-asset momentum model
of LL. It reduces to LL’s model for N = 1. It is also commonly used in the literature
(e.g., Grinblatt and Moskowitz, 2004; Heston and Sadka, 2008; and Lewellen, 2015;
among others) that documents that the coefficient β is significantly positive even
after controlling for other factors. This model is also supported by the regression
results reported in Table 1 Panel A.
Now we derive the optimal dynamic trading strategy for an investor who maxi-
mizes the expected utility over terminal wealth WT . We assume that the riskless
rate is a constant r. The optimization problem of the investor is given by
1−γ
WT
max E0 , (B.3)
{φi,t }t∈[0,T ] 1−γ
where φi,t is the portfolio weight of stock i at time t, T is the investment horizon,
γ > 0 is a constant relative risk aversion (CRRA) coefficient, and the wealth Wt
satisfies
dWt 0
= φt (α + βmt − r) + r dt + φ0t ΣdBt ,

(B.4)
Wt
where φt = (φ1,t , φ2,t , · · · , φN,t )0 , mt = (m1,t , m2,t , · · · , mN,t )0 , and Bt = (dB1,t , dB2,t , · · · , dBN,t )0
are N × 1 vectors and Σ = diag(σi ) is a N × N diagonal matrix. The optimal port-
folio weight of stock i is, according to Proposition 3.4 of LL, given by
φ∗i,t = φM H
i,t + φi,t . (B.5)
It consists of two components. The first φM

i,t is the myopic demand given by
β α−r
φM
i,t = m +
2 i,t
(B.6)
γσi γσi2
that depends on momentum mi,t . The second is the intertemporal hedging demand
given by
β(1 − γ) H
φH
i,t = mi,T,t + ci , (B.7)
γσi2
where mH i,T,t is a weighted average of historical returns with the form mi,T,t =
H
Rt
ω dRi,v and ci is a constant. Applying the Cox-Huang (1989) approach, Propo-
t−τ i,v
sition 3.4 of LL derives the closed-form solutions of both the weight ωi,v and ci . To
save space, we do not specify them in this paper. LL show that mH i,T,t places more
weights on more recent historical returns and the weights rely on parameters γ, α,
β, and σi . Especially, to the leading order of 1/γ, mH
i,T,t reduces to the intertemporal

26
momentum (IM) variable for stock i studied in our paper:

Z t
H
mi,T,t = ω̂v dRi,v , (B.8)
t−τ
where the weight ω̂v is given by (3.2). The proof of (B.8) follows Corollary 3.5 of
LL.
Equations (B.5)-(B.8) show that, different from the myopic demand that depends
on momentum, the hedging demand however depends on IM. It is induced by in-
tertemporal hedging of Merton (1971) and provides a hedge for reinvestment risk
over long horizons. The intertemporal momentum strategies examined in our paper
explore this variable.
The new state variable IM reflects the path dependence that is inherent with
momentum. In contrast, for the optimal portfolio problems with Markovian state
variables, the original state variables that characterize the stock prices can consti-
tute a sufficient statistic of the indirect utility and hence can fully characterize the
optimal dynamic portfolios. This is the key difference between path-dependent s-
tate variables, such as momentum, and Markovian state variables, and underlies our
intertemporal factors for long investment horizons.

27
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30
Figure 1. The figure illustrates the returns used to forecast the future
return rt at month t, for t = 1, 2, · · · , 12. The future return r1 is forecasted
by returns {r−11 , r−10 , · · · , r0 }; r2 is forecasted by returns {r−10 , r−9 , · · · , r1 };
· · · ; and r12 is forecasted by returns {r0 , r1 , · · · , r11 }. It shows that more
recent historical returns predict more future returns. So a multiperiod
investor should use a new momentum variable that places more weights
on more recent historical returns to manage reinvestment risk.

31
Figure 2. The figure illustrates the weights placed on historical returns

by the myopic momentum variable MM with a look-back period of 12
months (the left panel), the intertemporal momentum variable IM with
a look-back period of 12 months and a horizon of 12 months (the
middle panel), and the adjusted intertemporal momentum variable IM⊥
(=IM-MM) (the right panel).

32
Figure 3. The upper panel and middle panel illustrate the smoothed
overlapping ratios (moving average of 10 observations before, current
observation and 10 observations after) between our double-sort
portfolio and the myopic momentum portfolio for the long legs and
short legs respectively. The lower panel plots the smoothed overlapping
ratios for portfolios (the average of the ratios for long legs and short
legs) and the market index.

33
Table 1. Firms return prediction of MM and IM

This table reports the results of the Fama-MacBeth cross-sectional regressions at the
firm level. We regress future (1-month, 3-month, 6-month, 9-month, and 1-year) firm
returns onto both MM and IM variables: ri,t:t+T = a + b1 mi,t + b2 mH
i,T,t + i , where
ri,t:t+T (T = 1, 3, 6, 9, 12 months) is the T -month ahead return for firm i, mi,t is the
standard momentum variable for firm i, namely the past 12-month cumulative return
skipping the most recent month, and mH
i,T,t is the IM variable for firm i with investment
horizon T months and look-back period of 12 months (τ = 1 year) at time t. Coefficients
(in percentage), Fama-MacBeth t-statistics and adjusted R2 statistics (in percentage) are
reported. Our sample is monthly from December 1926 through December 2017.
horizon (T ) mi mH
i,3 mH
i,6 mH
i,9 mH
i,12 adj. R2 (%)
Panel A: ri,t:t+T = am + bm mi,t + m
i
1-month 7.41 1.93
(3.05)
3-month 6.56 1.74
(4.42)
6-month 4.82 1.51
(5.28)
9-month 3.43 1.36
(5.31)
12-month 1.74 1.07
(3.12)
Panel B: ri,t:t+T = aH + bH mH H
i,T,t + i
3-month 9.26 1.97
(8.90)
6-month 7.89 1.78
(12.40)
9-month 6.27 1.62
(13.02)
12-month 4.61 1.40
(11.39)
Panel C: ri,t:t+T = a + b1 mi,t + b2 mH

i,T,t + i
3-month -0.97 10.46 2.73
(-0.54) (5.86)
6-month -4.27 11.22 2.74
(-3.16) (9.90)
9-month -4.85 10.19 2.53
(-5.27) (12.78)
12-month -5.66 9.02 2.33
(-7.23) (13.13)

34
Table 2. Single-sorted intertemporal momentum strategies
This table reports the Sharpe ratio (SR), mean (in percentage), standard deviation (SD) (in percentage), and skewness (skew) of the
portfolio returns, as well as the risk-adjusted returns (in percentage) relative to the three-factor model of Fama and French (1993) (FF3
α) and the five-factor model of Fama and French (2015) (FF5 α) and the t-statistic. The Sharpe ratios are in annual term and the other
results are in monthly terms. Standard errors are adjusted for heteroskedasticity and serial correlation according to Newey and West
(1987). All results are in monthly terms. The IM variable is derived by the optimal dynamic theories based on the assumption that past
12-month returns can positively predict next month return. Panel A reports the returns to the standard myopic momentum strategy
using single-sort involving MM (mt ) for 1-month holding period. Panel B reports the returns to the intertemporal momentum strategies
using single-sort involving the IM (mH
12,t ) for holding periods up to five years. Our sample is monthly from December 1926 through
December 2017.
horizon long leg (L) short leg (S) L-S
SR mean SD skew FF5 α t(FF5 α) SR mean SD skew FF5 α t(FF5 α) SR mean SD skew FF3 α t(FF3 α) FF5 α t(FF5 α)
Panel A: standard myopic momentum strategy involving MM
1-month 0.72 1.89 7.79 -0.22 1.15 (8.45) 0.16 0.83 11.85 2.16 0.12 (0.37) 0.32 1.07 8.44 -3.35 1.62 (7.99) 1.03 (2.57)
Panel B: intertemporal momentum strategies involving IM

3-month 0.86 1.66 5.56 0.55 1.03 (9.06) 0.24 0.77 7.22 1.99 -0.20 (-1.08) 0.49 0.89 4.38 -2.97 1.24 (7.28) 1.23 (5.20)
6-month 1.18 1.65 4.02 0.40 0.96 (8.59) 0.34 0.74 4.78 0.73 -0.34 (-2.17) 0.78 0.90 2.79 -1.38 1.09 (8.30) 1.30 (6.29)
9-month 1.40 1.58 3.23 -0.04 0.90 (8.92) 0.45 0.77 3.78 0.41 -0.48 (-3.93) 0.82 0.81 2.24 -1.36 1.00 (9.18) 1.38 (8.21)
12-month 1.49 1.47 2.78 -0.01 0.78 (9.12) 0.61 0.86 3.32 0.94 -0.42 (-3.66) 0.60 0.61 1.92 -1.64 0.84 (8.28) 1.20 (8.40)
24-month 1.81 1.28 1.92 -0.39 0.54 (6.36) 1.04 0.98 2.35 0.57 -0.26 (-2.47) 0.06 0.32 1.36 -1.36 0.52 (6.83) 0.80 (5.99)
36-month 2.36 1.29 1.49 -0.27 0.47 (5.51) 1.35 1.01 1.88 0.41 -0.12 (-0.87) 0.01 0.28 1.24 -0.99 0.51 (6.78) 0.59 (4.27)

Table 3. Volatility-scaled intertemporal momentum strategies
α) and the five-factor model of Fama and French (2015) (FF5 α) and the t-statistic. Standard errors are adjusted for heteroskedasticity
and serial correlation according to Newey and West (1987). The Sharpe ratios are in annual term and the other results are in monthly
terms. Panel A (B) reports the returns to the volatility-scaled single-sort (double-sort) intertemporal momentum strategies for holding
periods up to five years. Our sample is monthly from December 1926 through December 2017.
horizon Panel A: Single-sort Panel B: Sequential double-sorts
SR mean SD skew FF3 α t(FF3 α) FF5 α t(FF5 α) SR mean SD skew FF3 α FF3 t(α) FF5 α t(FF5 α)
3-month 1.33 5.04 12.37 -0.09 5.62 (10.40) 6.95 (8.04) 1.29 4.79 12.15 -0.21 5.64 (11.19) 6.48 (7.92)
6-month 1.80 4.70 8.53 0.21 5.12 (11.15) 6.79 (8.88) 1.77 4.55 8.35 -0.06 5.29 (12.21) 6.54 (9.06)
9-month 1.87 4.22 7.30 0.31 4.73 (11.12) 6.75 (9.18) 1.84 4.15 7.29 0.25 4.98 (11.87) 6.70 (9.36)
12-month 1.72 3.43 6.33 0.30 3.96 (10.26) 5.88 (8.94) 1.71 3.41 6.36 0.35 4.23 (10.97) 5.94 (9.20)
24-month 1.27 2.04 4.82 0.37 2.73 (8.18) 4.00 (6.72) 1.29 2.09 4.87 0.49 3.07 (8.99) 4.26 (7.46)
36-month 1.16 1.81 4.58 0.57 2.74 (7.87) 3.16 (4.82) 1.18 1.81 4.49 0.62 2.96 (8.72) 3.38 (5.58)

35
36
Table 4. Factor Loadings and Factor Structure Loadings
This table reports the factor loadings on the five-factor model of Fama and French (2015) for the single-sorted intertemporal momentum
strategies. Panel A reports the results by regressing our T -month returns for the strategy with horizon of T on the average factors
across the corresponding T months. For the strategy with horizon of 12 month, Panel B reports the results of “breaking down” the
12-month returns. That is, we first split each 12-month return generated by an intertemporal momentum portfolio constructed at a
certain month into 12 monthly returns, namely the return generated by the portfolio during the first month of the holding period, the
return generated during the second month, · · · , during the twelve month. We call the time series of monthly returns that is generated by
all portfolios during the first month of the holding period the 1st-month returns, and call the monthly return series generated by each
portfolio during the sth month the sth-month returns. We regress the sth-month returns on the monthly three factors. The last line
reports the results for the pooled regression of all 12 time series. The dependent variables, MKT, SMB, HML, RMW, and CMA are the
market, size, value, profitability, and investment respectively. Standard errors are adjusted for heterogeneity. Our sample is monthly
from December 1926 through December 2017.
α (%) t(α) MKT t(MKT) SMB t(SMB) HML t(HML) RMW t(RMW) CMA t(CMA)
Panel A: T -month returns of the IM strategy with horizon of T
T=3 1.23 (5.20) -0.16 (-1.58) -0.27 (-1.67) -0.64 (-2.74) 0.05 (0.26) 0.47 (1.68)
T=6 1.30 (6.29) -0.21 (-1.75) -0.22 (-1.77) -0.52 (-2.33) -0.12 (-0.67) 0.27 (1.07)
T=9 1.38 (8.21) -0.31 (-2.28) -0.23 (-1.95) -0.51 (-2.56) -0.23 (-1.24) -0.02 (-0.07)
T=12 1.20 (8.40) -0.31 (-2.44) -0.24 (-1.87) -0.53 (-2.95) -0.17 (-0.88) 0.01 (0.02)
Panel B: “breaking down” returns for the IM strategy with 12-month horizon
1st-month 2.31 (3.08) -0.16 (-0.86) -0.30 (-0.98) -1.03 (-2.50) 1.52 (2.75) 1.73 (1.96)
2nd-month 1.81 (3.44) -0.12 (-0.92) -0.19 (-0.84) -0.91 (-2.80) 0.88 (2.21) 1.26 (2.07)
3rd-month 1.31 (3.31) -0.04 (-0.37) -0.14 (-0.78) -0.64 (-2.40) 0.66 (2.22) 0.65 (1.46)
4th-month 1.18 (3.55) -0.02 (-0.23) -0.15 (-0.96) -0.64 (-2.80) 0.41 (1.62) 0.45 (1.25)

5th-month 1.04 (3.76) -0.01 (-0.08) -0.12 (-0.91) -0.57 (-2.98) 0.28 (1.39) 0.28 (0.99)
6th-month 0.79 (3.34) 0.01 (0.11) -0.12 (-1.03) -0.48 (-3.05) 0.23 (1.17) 0.13 (0.53)
7th-month 0.70 (3.42) 0.01 (0.22) -0.18 (-1.75) -0.51 (-3.42) 0.09 (0.54) 0.07 (0.31)
8th-month 0.61 (3.29) 0.02 (0.44) -0.17 (-1.80) -0.51 (-3.88) -0.02 (-0.16) -0.05 (-0.29)
9th-month 0.47 (2.63) 0.06 (1.23) -0.20 (-2.20) -0.48 (-3.48) -0.09 (-0.70) -0.11 (-0.60)
10th-month 0.30 (1.72) 0.05 (0.95) -0.14 (-1.61) -0.51 (-4.07) -0.14 (-1.04) -0.14 (-0.73)
11th-month 0.02 (0.13) 0.06 (1.11) -0.19 (-2.07) -0.52 (-4.24) -0.12 (-0.95) -0.08 (-0.42)
12th-month -0.33 (-1.89) -0.00 (-0.02) -0.23 (-2.06) -0.64 (-3.83) -0.09 (-0.69) -0.10 (-0.50)
pooled 0.85 (8.41) -0.01 (-0.46) -0.18 (-3.98) -0.62 (-9.71) 0.30 (3.78) 0.34 (2.86)
37
Table 5. Isolation intertemporal momentum from standard momentum

This table reports the mean (in percentage), standard deviation (SD) (in percentage),
skewness (skew), and Sharpe ratio (SR) of the portfolio returns, as well as the
risk-adjusted returns (in percentage) relative to the three-factor model of Fama and
French (1993) (FF3 α) and the five-factor model of Fama and French (2015) (FF5 α)
and the t-statistic. Panel A reports the profits from sequential double-sorts involving
MM quintiles, then IM⊥ subportfolios (2 groups). Panel B reports the profits from
independent double-sorts that condition on MM, then IM⊥ . Panel C reports the average
returns across active portfolios from single-sort involving MM deciles and Panel D
reports the returns over the horizon from single-sort involving MM deciles. The Sharpe
ratios are in annual term and the other results are in monthly terms. Our sample is
monthly from December 1926 through December 2017.
horizon SR mean SD skew FF3 α t(FF3 α) FF5 α t(FF5 α)
⊥
Panel A: sequential double-sorts involving MM and IM
3-month 0.41 0.82 4.56 -3.22 1.35 (8.16) 1.06 (4.47)
6-month 0.67 0.85 2.95 -2.32 1.25 (9.64) 1.17 (5.88)
9-month 0.72 0.77 2.35 -1.81 1.14 (10.04) 1.31 (7.66)
12-month 0.53 0.59 2.00 -1.92 0.97 (9.32) 1.13 (7.74)
36-month -0.03 0.27 1.23 -0.96 0.60 (7.89) 0.62 (4.65)
Panel B: independent double-sorts involving MM and IM⊥

3-month 0.47 0.88 4.44 -2.93 1.40 (9.07) 1.11 (4.78)
6-month 0.70 0.88 2.95 -2.02 1.27 (10.19) 1.20 (6.19)
9-month 0.74 0.79 2.40 -1.04 1.16 (10.19) 1.30 (7.91)
12-month 0.57 0.61 2.02 -1.06 0.98 (9.37) 1.13 (7.83)
36-month 0.05 0.30 1.39 3.09 0.60 (8.03) 0.62 (4.74)
Panel C: single-sort involving MM (average returns across active portfolios)

3-month 0.29 0.96 8.28 -3.49 1.52 (7.53) 1.01 (2.80)
6-month 0.21 0.75 7.91 -3.69 1.32 (6.92) 0.94 (2.92)
9-month 0.14 0.58 7.56 -3.95 1.15 (6.47) 0.85 (2.93)
12-month 0.06 0.40 7.31 -4.14 0.97 (5.71) 0.74 (2.82)
36-month -0.03 0.22 5.88 -4.75 0.72 (5.62) 0.60 (3.06)
Panel D: using single-sort involving MM (returns over the horizon)

3-month 0.50 0.96 4.80 -2.92 1.51 (8.44) 1.27 (4.79)
6-month 0.52 0.76 3.22 -2.06 1.25 (8.84) 1.28 (5.82)
9-month 0.43 0.59 2.52 -1.75 1.06 (9.28) 1.29 (7.80)
12-month 0.20 0.40 2.10 -1.90 0.85 (8.53) 1.10 (7.73)
36-month -0.08 0.25 1.44 -0.81 0.72 (7.92) 0.73 (4.78)

38
Table 6. Portfolio Returns Calculated Across Portfolios at Each Month
α) and the five-factor model of Fama and French (2015) (FF5 α) and the t-statistic. Standard errors are adjusted for heteroskedasticity
and serial correlation according to Newey and West (1987). The Sharpe ratios are in annual term and the other results are in monthly
terms. Our sample is monthly from December 1926 through December 2017.
horizon Panel A: Single-sort Panel B: Sequential double-sorts
SR mean SD skew FF3 α t(FF3 α) FF5 α t(FF5 α) SR mean SD skew FF3 α t(FF3 α) FF5 α t(FF5 α)
3-month 0.28 0.89 7.59 -3.53 1.26 (6.71) 1.00 (2.88) 0.24 0.82 7.77 -3.49 1.35 (7.32) 0.87 (2.51)
6-month 0.31 0.88 6.83 -3.17 1.21 (7.15) 1.02 (3.31) 0.27 0.83 7.19 -3.86 1.33 (7.87) 0.91 (2.92)
9-month 0.29 0.79 6.24 -3.34 1.11 (7.12) 0.97 (3.57) 0.24 0.75 6.73 -4.12 1.25 (7.83) 0.91 (3.31)
12-month 0.20 0.61 5.74 -3.10 0.92 (6.33) 0.84 (3.44) 0.17 0.58 6.29 -3.92 1.07 (7.06) 0.81 (3.31)
36-month -0.01 0.26 4.30 -4.20 0.55 (5.27) 0.56 (3.32) -0.01 0.26 5.08 -4.64 0.70 (6.21) 0.58 (3.25)

Table 7. Rebalancing strategies
This table reports the results for the rebalancing strategies with 12-month investment horizon. Panel A reports the Sharpe ratio (SR),
mean (in percentage), standard deviation (SD) (in percentage), and skewness (skew) of the portfolio returns. Panel B reports the
risk-adjusted returns (in percentage) relative to the three-factor model of Fama and French (1993) and the beta’s. Panel C reports the
risk-adjusted returns (in percentage) relative to the five-factor model of Fama and French (2015) and the beta’s. Panel D reports the
risk-adjusted returns (in percentage) relative to the myopic momentum (UMD) and the beta. The Sharpe ratios are in annual term and
the other results are in monthly terms (the average return across the horizon of 12 months). Our sample is monthly from December
1926 through December 2017.
Panel A ω SR mean SD skew
(0.1, 0.1, 0.1, 0.1, 0.1) 1.63 1.20 1.96 -1.61
(0.2, 0.2, 0.2, 0.2, 0.2) 1.65 1.18 1.89 -0.86
(0.5, 0.5, 0.5, 0.5, 0.5) 1.63 1.11 1.78 0.37
(1, 1, 1, 1, 1) 1.44 1.03 1.81 1.43
(0.5, 0.4, 0.3, 0.2, 0.1) 2.01 1.28 1.73 -0.00
Panel B ω α t(α) MKT t(MKT) SMB t(SMB) HML t(HML)
(0.1, 0.1, 0.1, 0.1, 0.1) 1.44 (11.37) -0.12 (-1.55) -0.18 (-1.33) -0.31 (-2.70)
(0.2, 0.2, 0.2, 0.2, 0.2) 1.32 (11.00) -0.07 (-0.94) -0.00 (-0.02) -0.26 (-2.30)
(0.5, 0.5, 0.5, 0.5, 0.5) 1.14 (10.06) -0.06 (-0.67) 0.23 (1.64) -0.11 (-0.97)
(1, 1, 1, 1, 1) 0.97 (8.45) -0.04 (-0.42) 0.40 (2.64) 0.00 (0.01)
(0.5, 0.4, 0.3, 0.2, 0.1) 1.33 (11.62) -0.06 (-0.76) 0.15 (1.11) -0.12 (-1.07)
Panel C ω α t(α) MKT t(MKT) SMB t(SMB) HML t(HML) RMW t(RMW) CMA t(CMA)
(0.1, 0.1, 0.1, 0.1, 0.1) 1.49 (7.46) -0.17 (-1.08) -0.24 (-1.91) -0.16 (-0.74) -0.04 (-0.21) -0.05 (-0.18)
(0.2, 0.2, 0.2, 0.2, 0.2) 1.42 (7.76) -0.13 (-0.91) -0.13 (-1.16) -0.15 (-0.77) -0.09 (-0.54) -0.08 (-0.34)
(0.5, 0.5, 0.5, 0.5, 0.5) 1.24 (7.93) -0.05 (-0.48) -0.04 (-0.40) -0.19 (-1.13) -0.06 (-0.33) -0.00 (-0.01)
(1, 1, 1, 1, 1) 1.06 (7.77) -0.03 (-0.31) 0.03 (0.37) -0.19 (-1.31) -0.07 (-0.41) 0.05 (0.27)

(0.5, 0.4, 0.3, 0.2, 0.1) 1.47 (9.42) -0.09 (-0.76) 0.00 (0.04) -0.25 (-1.50) -0.03 (-0.16) 0.03 (0.15)
Panel D ω α t(α) UMD t(UMD)
(0.1, 0.1, 0.1, 0.1, 0.1) 0.42 (3.37) 1.19 (10.12)
39
(0.2, 0.2, 0.2, 0.2, 0.2) 0.54 (3.90) 0.98 (7.38)

(0.5, 0.5, 0.5, 0.5, 0.5) 0.74 (4.34) 0.57 (3.35)
(1, 1, 1, 1, 1) 0.84 (4.49) 0.29 (1.57)
(0.5, 0.4, 0.3, 0.2, 0.1) 0.84 (4.99) 0.67 (3.97)
40
Table A.1. Market return prediction of MM and IM

In this table, we regress future (1-month, 3-month, 6-month, 9-month, and 1-year) S&P
500 excess return onto both MM and IM variables: rt:t+T = a + b1 mt + b2 mH
T,t + t+1 ,
where rt:t+T (T = 1, 3, 6, 9, 12 months) is the T -month ahead excess return from t to
t + T , and mH
T,t is the IM variable with investment horizon T months and look-back
period of 12 months (τ = 1 year) at time t. In-sample Newey-West t-statistics (with a
lag of 12), and both in-sample adjusted R2 and out-of-sample R2 statistics in percentage
points are reported. The out-of-sample predictive regressions use the first 20% data as
training sample. Our sample is monthly from January 1871 to December 2017.
horizon (T ) mt mH3,t mH
6,t mH
9,t mH
12,t adj. R2 (%) 2
ROS (%)
Panel A: rt:t+T = a + bmt + t+1
1-month 0.23 0.57 -0.20
(1.95)
3-month 0.37 0.45 -0.41
(1.07)
6-month 0.54 0.46 -0.03
(0.88)
9-month 0.52 0.27 -0.14
(0.62)
12-month -0.07 0.00 -0.53
(-0.06)
Panel B: rt:t+T = a + bmH

T,t + t+1
3-month 0.46 0.70 -0.23
(1.36)
6-month 0.82 1.16 0.64
(1.47)
9-month 0.92 0.98 0.60
(1.33)
12-month 0.57 0.28 -0.30
(0.63)
Panel C: rt:t+T = a + b1 mt + b2 mH
T,t + t+1
3-month -2.39 2.76 1.30 -0.32
(-1.45) (1.73)
6-month -2.91 3.46 2.36 1.57
(-2.15) (2.84)
9-month -2.73 3.26 2.00 1.49
(-1.86) (3.00)
12-month -3.58 3.52 1.82 1.21
(-2.49) (3.71)

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HEDGING MOMENTUM

KAI LI†∗ AND LE MA§

Key words: Momentum, intertemporal hedging, dynamic portfolio strategies.

JEL Classification: G11, G12, G17

Date: June 24, 2019.

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and Uppal (2009) and Tu and Zhou (2011), among others.

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develop an estimation-risk-free method to explore the optimal momentum portfolios.

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The intertemporal strategies above exploring hedging are still buy-and-hold s-

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We study a simple combination of our intertemporal strategy with the volatility-

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2. Illustration of Hedging Momentum

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3. Intertemporal Hedging of Momentum

3.1. Intertemporal Hedging of Momentum. LL derive the optimal dynamic

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with 0 ≤ T ≤ τ . Larger T leads mH T,t to depend more heavily on more recent

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3.2. Return Predictability. This subsection examines the return predictability

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observations with invalid price/number of shares data, requiring at least 8 out of

4. Intertemporal Momentum Strategies

4.1. Intertemporal Momentum Strategies Involving IM. In this subsection,

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5. Comparisons between IM and MM

5.1. Isolating IM from MM. To investigate how intertemporal hedging adds

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positive weights on more recent returns. That is,

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double sorts provide a perfect situation to examine how intertemporal momentum

5.2. Portfolio Weights Comparison. The standard momentum strategies can

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5.3. Performance Comparison. Table 5 Panel C reports the portfolio returns

6. Dynamic Portfolio Rebalancing

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7.2. Risk Exposure over the Investment Horizon. In this subsection, we s-

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7.3. Across Time Versus Across Portfolios. In the previous section, to be in

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(IM) variables induced by intertemporal hedging. Hedging momentum helps multi-

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Appendix A. Market Return Predictability by MM and IM

rt:t+T = am + bm mt + t+1 , (A.1)

where rt:t+T is the T -month ahead excess return from t to t + T .

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Appendix B. Optimal Dynamic Cross-Sectional Momentum

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It consists of two components. The first φM

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momentum (IM) variable for stock i studied in our paper:

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Novy-Marx, R. (2012), ‘Is momentum really momentum?’, Journal of Financial Economics

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rt:t+T = am + bm mt + t+1 , (A.1)