Momentum Papers to Read
I need to understand why it works. Someone on Reddit said to not use HMM, don’t know why.
DON’T use an HMM.
Start from hypothesis about why momentum might fundamentally drive some excess returns (ie attention, psychology) have an edge and what it is. Google frog-in-the-pan effect. Quants might use some sort of linear factor model return decomposition, removing the influence of sector, value, size factors from the returns. Then study the residual after that and see what went up the most over various lookback windows. You could also look at vol adjusted returns, outlier adjusted returns, seasonality adjusted, etc. You could look at things things like autocorrelation, moving average crossovers / differences.