A Trend Factor: Any Economic Gains from Using Information over Investment Horizons?
Washington University in St. Louis - Olin School of Business
Tsinghua University - School of Economics & Management
In this paper, we provide a trend factor that captures simultaneously all three stock price trends: the short-, intermediate-, and long-term, by exploiting information in moving average prices of various time lengths whose predictive power is justified by a proposed general equilibrium model. It outperforms substantially the well-known short-term reversal, momentum, and long-term reversal factors, which are based on the three price trends separately, by more than doubling their Sharpe ratios. During the recent financial crisis, the trend factor earns 0.75% per month, while the market loses −2.03% per month, the short-term reversal factor loses −0.82%, the momentum factor loses −3.88%, and the long-term reversal factor barely gains 0.03%. The performance of the trend factor is robust to alternative formations and to a variety of control variables. From an asset pricing perspective, it also performs well in explaining cross-section stock returns.
Number of Pages in PDF File: 63
Keywords: Trends, Moving Averages, Asymmetric Information, Predictability, Momentum, Factor Models
JEL Classification: G11, G14
Date posted: December 2, 2012 ; Last revised: August 4, 2016