Optimal dynamic momentum strategies

Kai Li, Jun Liu

Research output: Contribution to journalArticlepeer-review

3 Citations (Scopus)


We explicitly solve for the optimal dynamic trading strategy between a riskless asset and a risky asset with momentum. The optimal portfolio weight depends not only on the momentum, as in Merton’s framework, but also on the historical price path; this contrasts with Merton. Because of their path dependence, optimal portfolio weights have a wide distribution for a given level of momentum; for example, investors may short the risky asset if it has rebound price paths but leverage if it has hump-shaped price paths. This effect tends to be the most significant after large price swings. Path dependence is solved with explicit formulas and presented with heuristic statistics.

Original languageEnglish
Pages (from-to)2054-2068
Number of pages15
JournalOperations Research
Issue number4
Early online date17 Feb 2022
Publication statusPublished - 1 Jul 2022


  • momentum
  • optimal portfolio
  • path dependence


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