The value at risk of time series dynamics and countercurrent trading strategies

The Value-at-Risk of Time Series Dynamics and Countercurrent Trading Strategies – Journal of Risk Model Validation

  • On a theoretical level, we show that passive strategies are riskier than active strategies and the relative magnitude of VaR of active strategies varies depending on the state of the market.
  • Empirically, we find that active strategies are more effective than passive strategies.

This paper not only provides a theoretical model for the value-at-risk of active and passive trading strategies, but also examines the substantial implications relating to risk management. Our results suggest that, first, passive strategies are riskier than active trading strategies based on historical returns, such as momentum and counter-current strategies. Second, dynamic (counter-current) trading is riskier in a bullish (bearish) market. Third, the value-at-risk of momentum (contrarian) strategies has a positive relationship with the absolute value of the autocorrelation of return, as well as a positive (negative) relationship with market condition. In addition, dynamic trading strategies offer superior risk-adjusted performance compared to other strategies in international stock markets.

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