Abstract

http://ssrn.com/abstract=2018681
 
 

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Market Timing with Moving Averages


Paskalis Glabadanidis


University of Adelaide Business School

November 9, 2012


Abstract:     
I present evidence that a moving average (MA) trading strategy third order stochastically dominates buying and holding the underlying asset in a mean-variance-skewness sense using monthly returns of value-weighted decile portfolios sorted by market size, book-to-market cash-flow-to-price, earnings-to-price, dividend-price, short-term reversal, medium-term momentum, long-term reversal and industry. The abnormal returns are largely insensitive to the four Carhart (1997) factors and produce economically and statistically significant alphas of between 10% and 15% per year after transaction costs. This performance is robust to different lags of the moving average and in subperiods while investor sentiment, liquidity risks, business cycles, up and down markets, and the default spread cannot fully account for its performance. The MA strategy works just as well with randomly generated returns and bootstrapped returns. I also report evidence regarding the profitability of the MA strategy in seven international stock markets. The performance of the MA strategies also holds for more than 18,000 individual stocks from the CRSP database. The substantial market timing ability of the MA strategy appears to be the main driver of the abnormal returns. The returns to the MA strategy resemble the returns of an imperfect at-the-money protective put strategy relative to the underlying portfolio. Furthermore, combining several MA strategies into a value/equal-weighted portfolio of MA strategies performs even better and represents a unified framework for security selection and market timing.

Number of Pages in PDF File: 68

Keywords: Market timing, moving average, technical analysis, conditional model

JEL Classification: G11, G12, G14

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Date posted: March 12, 2012 ; Last revised: November 9, 2012

Suggested Citation

Glabadanidis, Paskalis, Market Timing with Moving Averages (November 9, 2012). Available at SSRN: http://ssrn.com/abstract=2018681 or http://dx.doi.org/10.2139/ssrn.2018681

Contact Information

Paskalis Glabadanidis (Contact Author)
University of Adelaide Business School ( email )
10 Pulteney Street
Adelaide, South Australia 5005
Australia
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