What Is Momentum crash?
A momentum crash is a sudden, severe drawdown in a momentum strategy (such as UMD) that occurs when beaten-down “loser” stocks rebound violently, usually during a sharp market reversal following a panic. Because momentum is short the losers, a rebound rally inflicts large losses precisely when the broad market is recovering.
The canonical example is spring 2009: after the Global Financial Crisis bottom in March 2009, the most distressed stocks rallied hardest, and momentum strategies suffered one of their worst drawdowns on record. Momentum crashes are partly predictable — they tend to follow bear markets and high-volatility regimes — which motivates dynamic scaling and pairing momentum with a value hedge like HML-Devil.
Example: Green Lark notes that HML-Devil “is very useful” in the post-GFC momentum crash of 2009, which is why a value factor earns a large weight alongside a heavy momentum position.
Literature and references:
Kent Daniel and Tobias J. Moskowitz, Momentum Crashes, Journal of Financial Economics, 2016.
See also