Time Series Reversal in Trend Following Strategies
46 Pages Posted: 22 May 2017 Last revised: 29 Aug 2017
Date Written: May 22, 2017
A reversal pattern in the time series context from 12 to 24 months after the formation of trend following signals is observed in a universe of 55 liquid futures instruments. We find that instruments with sell signals in the trend following portfolio (i.e. "losers") contribute to this type of reversal, even if their profits are not realised. The instruments with buy signals in the trend following portfolio (i.e. "winners") contribute much less. A double-sorted strategy based on both return continuation and reversal yields to an average return of 18% per annum, which is significantly higher compared to its corresponding trend following strategy.
Keywords: Reversal, Trend Following, Market Timing, Time Series Momentum, Returns Signal Momentum
JEL Classification: G11, G12, G15
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