Which Trend Is Your Friend?

32 Pages Posted: 10 May 2015 Last revised: 19 Apr 2016

See all articles by Ari Levine

Ari Levine

AQR Capital Management

Lasse Heje Pedersen

AQR Capital Management, LLC; Copenhagen Business School - Department of Finance; New York University (NYU); Centre for Economic Policy Research (CEPR)

Date Written: May 7, 2015

Abstract

Managed-futures funds and CTAs trade predominantly on trends. There are several ways of identifying trends, either using heuristics or statistical measures often called “filters.” Two important statistical measures of price trends are time series momentum and moving average crossovers. We show both empirically and theoretically that these trend indicators are closely connected. In fact, they are equivalent representations in their most general forms, and they also capture many other types of filters such as the HP filter, the Kalman filter, and all other linear filters. Further, we show how these filters can be represented through “trend signature plots” showing their dependence on past prices and returns by horizon. Our results unify and broaden a range of trend-following strategies, and we discuss the implications for investors.

Keywords: trend-following investing, momentum, moving average crossover, filtering, managed futures, CTA

JEL Classification: G02, G1, G13, G14

Suggested Citation

Levine, Ari and Pedersen, Lasse Heje, Which Trend Is Your Friend? (May 7, 2015). Financial Analysts Journal, vol. 72, no. 3 (May/June 2016). Available at SSRN: https://ssrn.com/abstract=2603731 or http://dx.doi.org/10.2139/ssrn.2603731

Ari Levine

AQR Capital Management ( email )

Greenwich, CT
United States
2037423851 (Phone)

Lasse Heje Pedersen (Contact Author)

AQR Capital Management, LLC ( email )

Greenwich, CT
United States

Copenhagen Business School - Department of Finance ( email )

Solbjerg Plads 3
Frederiksberg, DK-2000
Denmark

New York University (NYU) ( email )

Stern School of Business
44 West 4th Street
New York, NY 10012-1126
United States

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

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