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A Trend Factor: Any Economic Gains from Using Information over Investment Horizons?

63 Pages Posted: 2 Dec 2012 Last revised: 4 Aug 2016

Yufeng Han

University of North Carolina (UNC) at Charlotte - Finance

Guofu Zhou

Washington University in St. Louis - Olin School of Business; CAFR (China Academy for Financial Research)

Yingzi Zhu

Tsinghua University - School of Economics & Management

Date Written: June 2016

Abstract

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.

Keywords: Trends, Moving Averages, Asymmetric Information, Predictability, Momentum, Factor Models

JEL Classification: G11, G14

Suggested Citation

Han, Yufeng and Zhou, Guofu and Zhu, Yingzi, A Trend Factor: Any Economic Gains from Using Information over Investment Horizons? (June 2016). Available at SSRN: https://ssrn.com/abstract=2182667 or http://dx.doi.org/10.2139/ssrn.2182667

Yufeng Han

University of North Carolina (UNC) at Charlotte - Finance ( email )

9201 University City Boulevard
Charlotte, NC 28223
United States

Guofu Zhou (Contact Author)

CAFR (China Academy for Financial Research)

Shanghai Advanced Institute of Finance
Shanghai P.R.China, 200030
China

Washington University in St. Louis - Olin School of Business ( email )

Washington University
Campus Box 1133
St. Louis, MO 63130-4899
United States
314-935-6384 (Phone)
314-658-6359 (Fax)

HOME PAGE: http://apps.olin.wustl.edu/faculty/zhou/

Yingzi Zhu

Tsinghua University - School of Economics & Management ( email )

Beijing, 100084
China
+86-10-62786041 (Phone)

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