Time series momentum and volatility scaling

•Large time series momentum alphas in futures markets are largely driven by volatility scaling.•Unscaled time series momentum alphas are similar to unscaled buy-and-hold alphas.•Scaled time series momentum alphas are similar to scaled buy-and-hold alphas.•The similarities hold at the individual contract, sector, or portfolio levels.

Moskowitz, Ooi, and Pedersen (2012) show that time series momentum delivers a large and significant alpha for a diversified portfolio of international futures contracts. We find that their results are largely driven by volatility-scaling returns (or the so-called risk parity approach to asset allocation) rather than by time series momentum. Without scaling by volatility, time series momentum and a buy-and-hold strategy offer similar cumulative returns, and their alphas are not significantly different. This similarity holds for most sectors and for a combined portfolio of futures contracts. Cross-sectional momentum also offers a higher (similar) alpha than unscaled (scaled) time series momentum.