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

UNCC

Guofu Zhou

Washington University in St. Louis - Olin School of Business

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

UNCC ( email )

9201 University City Boulevard
Charlotte, NC 28223
United States

Guofu Zhou (Contact Author)

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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