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What Drives Trend-Following Profits?

48 Pages Posted: 4 Apr 2017 Last revised: 15 Sep 2017

Adrian Zoicas-Ienciu

Babes-Bolyai University - Faculty of Economics and Business Administration

Date Written: April 1, 2017

Abstract

We document the nature of substantial yet transient trend-following profits in equity indexes and stocks. The analysis benefits from a novel framework for evaluating active trading, with generic reactions to buy/sell signals and explicit trading costs. We show that trend-following profits rely on favorable price characteristics rather than a genuine forecasting ability. The price sensitivity of trend signals greatly compliments the mean and variance of buy-and-hold returns in explaining the time series variation in buy and sell excess returns. Trend-following’s success revolves suspiciously around price declines and is oversensitive to the “benchmark – length of evaluation period” joint choice.

Keywords: active trading, trend-following, time series momentum, predictability, data snooping

JEL Classification: G11, G14

Suggested Citation

Zoicas-Ienciu, Adrian, What Drives Trend-Following Profits? (April 1, 2017). Available at SSRN: https://ssrn.com/abstract=2944679

Adrian Zoicas-Ienciu (Contact Author)

Babes-Bolyai University - Faculty of Economics and Business Administration ( email )

Str Teodor Mihali, Nr.58-60
Cluj-Napoca, RO- 400591
Romania

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