Trend Salience, Investor Behaviors and Momentum Profitability

38 Pages Posted: 14 Feb 2014 Last revised: 29 Jul 2019

See all articles by Gareth Hurst

Gareth Hurst

University of Newcastle (Australia)

Paul Docherty

The Brattle Group

Date Written: February 14, 2014

Abstract

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 [1997] 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

Hurst, Gareth and Docherty, Paul, Trend Salience, Investor Behaviors and Momentum Profitability (February 14, 2014). Available at SSRN: https://ssrn.com/abstract=2395718 or http://dx.doi.org/10.2139/ssrn.2395718

Gareth Hurst

University of Newcastle (Australia) ( email )

University Drive
Callaghan, NSW 2308
Australia

Paul Docherty (Contact Author)

The Brattle Group ( email )

44 Brattle Street
3rd Floor
Cambridge, MA 02138-3736
United States

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