Time-Varying Skewness and Momentum Crashes

We provide empirical evidence that the returns on US equity momentum exhibit a time-varying skewness which deepens during dramatic losses (crashes). As a result, the dynamics of the strategy expected returns reflects the time variation in {\it both} conditional volatility and skewness. This has first order implications for managing risks associated with momentum investing: an adjusted momentum portfolio which hedges in real time for both volatility and skewness risk outperforms benchmark constant and dynamic volatility-managed momentum strategies. This result holds for different levels of transaction costs and risk aversion and cannot be reconciled by the exposure to standard equity risk factors.