Admissibility Conditions in Risk Adjustment of Momentum Strategies

There are still ongoing debates on pro…tability of momentumstrategies mainly due to its sensitivity to the choice of bench-mark asset pricing model in its risk adjustment. In this paper,we explore admissibility conditions for the benchmark asset pric-ing model which should be met, so they could be used as di-agnostic tool in risk adjustment of momentum strategies. Underthis benchmark, high/low risk assets should have relatively higherfrequency of being included in the winners/losers group and therisk of a momentum strategy rises with respect to the positivemarket wide average risk premium. Empirically, we examined ifeach risk measure satis…es our admissibility conditions and wefound that non-parametric risk measures satisfy our rationalitycondition, while market betas do not. This simple but impor-tant result may be one explanation regarding the di¤erence inthe pro…tability assessment of momentum trading strategies.