Moving Average Distance as a Predictor of Equity Returns
40 Pages Posted: 16 Feb 2018 Last revised: 1 Sep 2020
Date Written: May 22, 2018
The distance between short- and long-run moving averages of prices (MAD) predicts future equity returns in the cross-section. Annualized value-weighted alphas from the accompanying hedge portfolios are around 9%, and the predictability goes beyond momentum, 52-week highs, profitability, and other prominent anomalies. MAD-based investment payoffs survive reasonable trading costs faced by institutions, and are stronger on the long side relative to the short counterpart.
Keywords: market efficiency, technical analysis, moving averages, crossing rules,anchoring bias
JEL Classification: G12, G14
Suggested Citation: Suggested Citation