The momentum risk premium is one of the most important alternative risk premia alongside the carry risk premium. However, it appears that it is not always well understood.
For example, is it an alpha or a beta exposure? Is it a skewness risk premium or a market anomaly? Does it pursue a performance objective or a hedging objective? What are the differences between time-series and crosssection momentum? What are the main drivers of momentum returns? What does it mean when we say that it is a convex and not a concave strategy? Why is the momentum risk premium a diversifying engine, and not an absolute return strategy?
The goal of this paper is to provide specific and relevant answers to all these questions. The answers can already be found in the technical paper “Understanding the Momentum Risk Premium” published recently by Amundi’s Quantitative Research Team. However, the underlying mathematics can be daunting to readers. Therefore, this discussion paper presents the key messages and the associated financial insights behind these results.