Size Matters: Tail Risk, Momentum, and Trend Following in International Equity Portfolios

Abstract

The authors investigate the relationship between size and momentum across a wide range of international equity markets. They distinguish between relative momentum, where by assets are ranked according to their performance against each other, and absolute momentum (or trend following), where by assets are categorized according to whether they have recently exhibited positive, nominal return characteristics. They find only limited evidence for the outperformance of relative momentum portfolios. Trend following, however, is observed to be a very effective strategy over the study period, delivering superior risk-adjusted returns across a range of size categories in both developed and emerging markets while not reversing the performance superiority of smaller firms. The authors also find, contrary to popular perception, that it is the mid-cap sector that dominates in emerging markets, and they suggest that this sector should be considered as being equivalent to developed economy small-cap investing.