Trend Factor: A New Determinant of Cross-Section Stock Returns
University of Colorado at Denver - Business School
Washington University in St. Louis - Olin School of Business
October 1, 2013
In this paper, we propose a trend factor to capture cross-section stock price trends. In contrast to the popular momentum factor constructed by sorting stocks based on a single criterion of past year performance, we form our trend factor with a cross-section regression approach that makes use of multiple trend indicators containing daily, weekly, monthly and yearly information. We find that the average return on the trend factor is 1.61% per month, more than twice of the momentum factor. The Sharpe ratio is more than twice too. Moreover, during the recent financial crisis, the trend factor earns 1.65% per month while the momentum factor loses 1.33% per month. The trend factor return is robust to a variety of control variables including size, prior month return, book-to-market, idiosyncratic volatility, liquidity, etc., and is greater under greater information uncertainty. In addition, the trend factor explains well the cross-section decile portfolio returns sorted by short-term reversal, momentum, and long-term reversal as well as various price ratios (e.g. E/P), and performs much better than the momentum factor.
Number of Pages in PDF File: 57
Keywords: Trends, Factor Models, Momentum, Moving Averages, Predictability
JEL Classification: G11, G14working papers series
Date posted: December 2, 2012 ; Last revised: November 1, 2013
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