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Economic and Market Commentary

Value Cashes When Momentum Crashes

  • We construct a value-momentum portfolio using a novel approach utilizing the correlation between the rankings of value and momentum signals.
  • This rank correlation enables us to form a dynamically weighted value-momentum portfolio that has performed well.
  • The logic of why the rank correlation combines value and momentum strategies well is that it underweights momentum when it disagrees with value the most. When this disagreement has been extreme in the past, it has resulted in a momentum “crash.”
  • The rank correlation predicts the returns of value and momentum better than the value spread.

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