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Design and Validation of Ranking Statistical Families for Momentum-Based Portfolio Selection

Sarah Marietta Tooth

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Abstract

In this thesis we will evaluate the effectiveness of using daily return percentiles and power means as momentum indicators for quantitative portfolio selection. The statistical significance of momentum strategies has been well-established, but in this thesis we will select the portfolio size and holding period based on current (2012) trading costs and capital gains tax laws for an individual in the United States to ensure the viability of using these strategies. We conclude that the harmonic mean of daily returns is a superior momentum indicator for portfolio construction over the 1970-2011 backtest period.

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In this thesis we will evaluate the effectiveness of using daily return percentiles and power means as momentum indicators for quantitative portfolio selection. The statistical significance of momentum strategies has been well-established, but in this thesis we will select the portfolio size and holding period based on current (2012) trading costs and capital gains tax laws for an individual in the United States to ensure the viability of using these strategies. We conclude that the harmonic mean of daily returns is a superior momentum indicator for portfolio construction over the 1970-2011 backtest period.

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Available abstract

In this thesis we will evaluate the effectiveness of using daily return percentiles and power means as momentum indicators for quantitative portfolio selection. The statistical significance of momentum strategies has been well-established, but in this thesis we will select the portfolio size and holding period based on current (2012) trading costs and capital gains tax laws for an individual in the United States to ensure the viability of using these strategies. We conclude that the harmonic mean of daily returns is a superior momentum indicator for portfolio construction over the 1970-2011 backtest period.

Key concepts: Portfolio, Momentum (technical analysis), Econometrics, Ranking (information retrieval), Selection (genetic algorithm), Economics, Modern portfolio theory, Actuarial science

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