Technical Trading: A Trend Factor
University of Colorado at Denver - Business School
Washington University in St. Louis - Olin School of Business
Tsinghua University - School of Economics & Management
July 28, 2014
In this paper, we provide a general equilibrium model to analyze how technical traders compete trading with informed investors and how they affect stock prices. Based on the model, we propose a trend factor that captures cross-section short-, intermediate- and long-term stock price trends. The trend factor has an average return of 1.63% per month, doubling the market average return and quadrupling the market Sharpe ratio. During the recent financial crisis, it earns 0.79% per month while the market loses -2.03% per month. From an asset pricing perspective, it helps in explaining cross-section stock returns. Internationally, the trend factor also performs well in other G7 countries.
Number of Pages in PDF File: 68
Keywords: Trends, Moving Averages, Asymmetric Information, Predictability, Momentum, Factor Models
JEL Classification: G11, G14working papers series
Date posted: December 2, 2012 ; Last revised: July 29, 2014
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