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I read the paper "Momentum has its moments" (Pedro Barroso and Pedro Santa-Clara, 2012 - available free from Nova Business School), though i didn't fully understand something important, when speaking about changing weights on the WML the authors speak about number that varies from 0.2 to 2, but since WML consist of long and short what these numbers mean for them? the long and short positions are always equal? this question is not just for this specific paper.. Thanks!

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    Damn you now I have another paper that I want to read!
    – MD-Tech
    Sep 27, 2017 at 14:17

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The paragraph before on page 115 states:

Scaling corresponds to having a weight in the long and short legs that is different from one and varies over time, but the strategy is still self-financing.

Meaning that the long and short positions are no longer equal due to weighting one side more highly than the other. The weighting of one side (either long or short) is the number between 0.2 and 2 that you mention.

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  • I noticed that paragraph but still, if the long and short legs are different, so how can i interpret a single number (the weights that varies from 0.2 to 2) to some weights for the long and short leg?
    – yudyud
    Sep 27, 2017 at 18:06
  • The other side has 1 or 100 or whatever basis You're working on minus the weight of the side you know. It seemed to be clear in context but if it isn't I'd be happy to interpret for you
    – MD-Tech
    Sep 27, 2017 at 18:09
  • Hi, it will be great if you can explain. for example, before the 1st of the next month i calculated the weight as the paper suggest (actually i'm not sure how exactly), i get a number, let the number be 0.7. so now what?
    – yudyud
    Sep 27, 2017 at 20:29
  • the weighting will be a function of the long vs short tails of the distribution of the prices, remembering that returns are generally taken to be distributed lognormally. This weight is then applied to the portfolio size to determine the long and short quantities in that proportion. Without doing their maths entirely again I can't tell you the exact proportions that they are using. You'd be better off asking that on quant.stackexchange.com
    – MD-Tech
    Sep 28, 2017 at 7:32
  • Hi, after asking on quant.stackexchange.com i'm coming back.. maybe you can explain deeply the calculation of the weights for the long and short from the distribution?
    – yudyud
    Oct 2, 2017 at 6:42

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