Momentum strategies have produced high returns and Sharpe ratios, and strong positive alphas relative to market models and other standard factors models. However, the returns to momentum strategies are highly skewed; they experience infrequent but strong and persistent strings of negative returns....

Momentum strategies exhibit rare but dramatic losses (crashes), which we show are a result of the leverage dynamics of stocks in the momentum portfolio. When the economy is in a hidden turbulent state associated with a depressed and volatile stock market, the short-side of the momentum portfolio...