Exercise - Value and momentum

This empirical exercise is based on the work by Assess, Moskowitz and Ped-ersen (2013).

Portfolios and factors construction

Let's construct tradable portfolios from the given dataset.

1. Upload data (filename: Assignment2014.xlsx) in the statistical soft-ware package.

2. Data contain monthly closing prices and price to book ratios for a large cross-section of stocks in the US. The first row contains the ticker of any given stock, whereas the second row contains the sector. Blank cells indicate that no data is available for that particular stock at that particular date.

3. Upload Fama-French and momentum factors monthly data from Ken- neth French's website.

4. Form three momentum portfolios following the methodology of Assess, Moskowitz and Pedersen (2013).

5. Form three value portfolios following the methodology of Assess, Moskowitz and Pedersen (2013).

6. Form the union portfolio (combo portfolio, equation (3) of Assess, Moskowitz and Pedersen, 2013).

7. Form the intersection portfolio as following:

- Select those stocks that feature in the High momentum portfolio and in the Low price to book portfolio (portfolio A).

- Select those stocks that feature in the Low momentum portfolio and in the High price to book portfolio (portfolio B).

Trading strategies

Calculate the return series of the following equally weighted trading strate- gies, rebalanced every month:
- Momentum strategy.
- Value strategy.
- Combo strategy.
- Intersection strategy. The intersection strategy goes long portfolio A and shorts portfolio B.

For any trading strategy, report summary statistics, Sharpe ratios, t-ratios, maximum drawdowns, a plot of the cumulative returns over time, portfolio turnover and the average number of stocks within any portfolio. Comment on the different performances and risk-return profiles of the strategies, on the benefits of combining value and momentum and on the difference between the combo and the intersection strategy.

Risk attribution

Run regressions of each strategy's returns on the three Fama-French factors plus momentum and comment on the sign, size and the significance of the estimated alphas and betas.