Stock Return Predictability from Moving Averages of Prices
48 Pages Posted: 16 Feb 2018 Last revised: 27 Nov 2019
Date Written: May 22, 2018
The distance between short- and long-run moving averages of prices (MAD) is strongly linked to future equity returns in the cross-section. Annualized alphas from the accompanying hedge portfolios are in the range of 9%-14%, and the predictability goes beyond momentum, 52-week highs, profitability, and other prominent anomalies. MAD-based investment payoffs easily survive reasonable trading costs. The predictability also applies at the aggregate market and industry levels. We also find that top MAD stocks are not markedly different from other stocks in terms of size or institutional holdings, and tend to be liquid and have higher turnover than other stocks.
Keywords: market efficiency, technical analysis, moving averages, crossing rules
JEL Classification: G12, G14
Suggested Citation: Suggested Citation