Trend Salience, Investor Behaviors and Momentum Profitability

32 Pages Posted: 14 Feb 2014

See all articles by Paul Docherty

Paul Docherty

Monash University

Gareth Hurst

University of Newcastle (Australia)

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

Docherty, Paul and Hurst, Gareth, 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

Paul Docherty (Contact Author)

Monash University ( email )

23 Innovation Walk
Wellington Road
Clayton, Victoria 3800
Australia

Gareth Hurst

University of Newcastle (Australia) ( email )

University Drive
Callaghan, NSW 2308
Australia

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