Absolute vs Relative Momentum: Mathematical Foundations & Cash Protection [2026]
Date Published
1. Mathematical Definitions and Mechanics
Cross-Sectional vs Time-Series Formulations
Relative momentum ranks an asset's return R_i relative to an opportunity set {R_1, R_2, ..., R_n}. While effective during bull regimes, relative momentum will force you to remain 100% long during market crashes if all assets are falling.
Absolute momentum tests whether R_i(t - L, t) > R_f, where R_f is the risk-free rate and L is the lookback parameter. If negative, capital moves immediately to safe cash equivalents.
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