Folio Lab/Documentation

Quintile Momentum

Rank assets by a momentum (or alternative) score over a lookback window and equal-weight the top quintile. A non-MVO factor strategy directly implementing the long-leg of the classical momentum factor.

Overview

Cross-sectional momentum is one of the most extensively documented anomalies in equity markets. Jegadeesh & Titman (1993) showed that buying recent winners and shorting recent losers earns positive risk-adjusted returns; in the long-only setting, simply holding the top quintile of past performers has historically outperformed equal-weighting the universe.

Folio Lab's Quintile Momentum optimiser computes a per-asset score over a configurable lookback (default 126 trading days, ~6 months), selects the top fraction (default 20%), and equal-weights the survivors. Alternative scoring methods (low-volatility, in-sample Sharpe) are also supported.

Mathematical Formulation

With prices over a lookback of trading days, the default momentum score for asset is the cumulative return:

Alternative scores supported by Folio Lab:

  • Low volatility:
  • Sharpe:

The selection is the top assets by score (with default top fraction ), each receiving equal weight :

Advantages & Limitations

Advantages

  • Simple: No solver, no covariance matrix.
  • Empirically robust: Momentum has worked across markets and decades.
  • Concentration aware: Equal weight on a subset avoids over-fitting weights.
  • Configurable signal: Swap the score function as a research lever.

Limitations

  • Crash risk: Momentum suffers severe drawdowns in trend reversals.
  • Turnover: Periodic re-ranking can be expensive in small caps.
  • No risk control: Equal weights ignore volatility differences.
  • Lookback sensitivity: Short-term reversal vs medium-term momentum is regime-dependent.

References

  • Jegadeesh, N., & Titman, S. (1993). "Returns to Buying Winners and Selling Losers: Implications for Stock Market Efficiency." The Journal of Finance, 48(1), 65-91.
  • Asness, C. S., Moskowitz, T. J., & Pedersen, L. H. (2013). "Value and Momentum Everywhere." The Journal of Finance, 68(3), 929-985.
  • Daniel, K., & Moskowitz, T. J. (2016). "Momentum crashes." Journal of Financial Economics, 122(2), 221-247.