Risk-Managed Momentum in Europe

Abstract: This thesis sets out to evaluate a risk-managed momentum strategy in the European stock market. The recent performance of momentum in Europe is first evaluated. A momentum premium still exists in Europe but the strategy suffered large losses in 2009. A risk-managed momentum portfolio is created by dynamically scaling the exposure to momentum based on a monthly volatility forecast. The risk-managed strategy is evaluated by comparing its performance to the original momentum portfolio. Risk management doubles the Sharpe ratio of the momentum portfolio and reduces tail risk. The greatest benefit of risk management comes from avoiding momentum crashes. The strategy increases the Sharpe ratio in all subsamples and the results are robust in international markets.