Trend Salience, Investor Behaviors and Momentum Profitability
38 Pages Posted: 14 Feb 2014 Last revised: 29 Jul 2019
Date Written: February 14, 2014
Trend extrapolation in financial markets has been well documented, however it is contentious as to which trends will be extrapolated or mean reverted. We examine whether investors are more likely to extrapolate trends that they perceive to be salient by examining an investment strategy that considers both the magnitude and the strength of the trend. Consistent with behavioral models of momentum, our investment strategy based on trend salience significantly outperforms traditional momentum strategies and is not explained by the Carhart  four-factor model. The relative performance of the trend salience signal is robust across different investment horizons and size-sorted portfolios, although is time-varying; the strategy does not outperform momentum in "down" markets where volatility is high and salient trends are more difficult to identify.
Keywords: Momentum, trend salience, extrapolation, market states
JEL Classification: G02, G11, G12
Suggested Citation: Suggested Citation