Stock Return Predictability: New Evidence from Moving Averages of Prices and Firm Fundamentals
76 Pages Posted: 16 Feb 2018 Last revised: 5 Feb 2019
Date Written: May 22, 2018
The distances between short- and long-run moving averages of prices and deviations of accounting fundamentals from their preceding means both are linked to future equity returns in the cross-section. This predictive power goes well beyond momentum, 52-week highs, profitability, and other prominent anomalies. Data on corporate news releases supports the notion that the predictability arises because investors underreact to deviations from prevailing anchors. Fundamentals-based anchoring predicts returns incremental to the price analog and both forms of predictability are economically significant. The anchoring rationale goes beyond the cross section and extends to the aggregate market and industry levels.
Keywords: market efficiency, technical analysis, moving averages, crossing rules, anchoring bias
JEL Classification: G12, G14
Suggested Citation: Suggested Citation