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AQR's Asness on Fama on Momentum

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This is like having your parents argue in front of you.

Fama on Momentum

"Risk isn’t just the chance of losing money, it’s about when you lose, and losing after the worst is over and during the rebound is not as “risky” as losing in the bad times (though admittedly there’s no guarantee we won’t see the opposite one day).

So, I don’t think the historical evidence that momentum is particularly “risky” (in the sense economists generally mean “risky”) is very strong. This doesn’t mean we won’t eventually find evidence that momentum is really a risk premium — just that we haven’t yet. But, the important point is not what I believe, it’s what Professor Fama believes or implies here. Professor Fama, by dropping that “momentum tends to blow up every now and then,” is clearly implying momentum is very risky. When anyone drops a bomb like that and leaves it there he’s clearly telling you it’s something to be feared — with “feared” presumably corresponding to real risk!

Not that there's anything wrong with that. Except that, of course, Professor Fama earlier thought momentum was too high turnover to represent a risk factor so it's immediately confusing that we’re supposed to be scared of this “crash risk” that isn't really “risk.” Apparently, momentum’s fast-changing exposures do, according to Fama, expose it to a potential risk factor. But I'll leave that paradox alone — clearly despite his arguments about turnover we are meant to think the risk behind momentum has been discovered and it has scary crashes! Nonetheless, Professor Fama is of course free to disagree with my discussion above (my view that momentum crashes are diversifiable and haven’t happened when they’d hurt the most) and think that the left-tailed behavior we’ve observed in the momentum factor shows it’s very risky indeed. But what’s odd — and yes, I’m finally getting to the point of this whole discussion — is that he doesn’t conclude these thoughts with a resounding statement akin to “and this is why I’m a deep, abiding, passionate and proselytizing believer in the momentum factor!” Now that, coming from Professor Fama, would indeed be news, and would be entirely consistent with his observation about crashes and his implied belief that they represent risk. Again, despite his protestations that high turnover momentum can’t be risk-based, why mention these “crashes” if not to imply they are a very important source of risk?"
Date: Feb 6, 2016   


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