A risk-sensitive momentum approach to stock selection
A risk-sensitive momentum approach to stock selection

Summary/Abstract: One of the main implications of Lo’s Adaptive Markets Hypothesis (2004, 2012, 2017) is that returns of virtually all assets can change over time. We present a local linear trend smoothing method by which this phenomenon can be captured empirically. Moreover, we introduce two localised, amended goodnessof- fit indicators capable of capturing both the direction and the continuity of recently observed price trends. Our related empirical investigation is based on a sample of 30 German blue-chip stock price series observed over a period of more than 16 years. Its results indicate that the use of these indicators as a stock-screening device can be a more useful means of identifying stocks with a superior risk/return profile than applying a conventional momentum strategy. The validity of this finding is underscored by statistical significance tests based on a Moving Blocks Bootstrap procedure.

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