Market Volatility and the Trend Factor

15 Pages Posted: 29 Nov 2023

See all articles by Ming Gu

Ming Gu

Xiamen University - School of Economics

Minxing Sun

University of North Georgia

Zhitao Xiong

Xiamen University - Wang Yanan Institute for Studies in Economics (WISE)

Weike Xu

Clemson University - Department of Finance

Date Written: November 2, 2023

Abstract

This paper investigates how stock market volatility predicts trend factor profits. We find that the trend factor performs significantly better following high market volatility periods. From 1931 to 2022, the average monthly risk-adjusted return following high volatility periods is 2.47%, significantly higher than that following low volatility periods. We hypothesize that fundamental signals are more likely to be imprecise when the stock market is more volatile, leading investors to rely more heavily on trend signals. Consequently, the trend factor could deliver higher profits. Collectively, our paper suggests that market volatility is an important time-series determinant of trend factor performance.

Keywords: market volatility, trend factor, time-series variation, information uncertainty

JEL Classification: G11, G12, G14

Suggested Citation

Gu, Ming and Sun, Minxing and Xiong, Zhitao and Xu, Weike, Market Volatility and the Trend Factor (November 2, 2023). Available at SSRN: https://ssrn.com/abstract=4621388 or http://dx.doi.org/10.2139/ssrn.4621388

Ming Gu (Contact Author)

Xiamen University - School of Economics ( email )

Xiamen, Fujian
China

Minxing Sun

University of North Georgia ( email )

Gainesville, GA 30566
United States

Zhitao Xiong

Xiamen University - Wang Yanan Institute for Studies in Economics (WISE) ( email )

A 307, Economics Building
Xiamen, Fujian 10246
China

Weike Xu

Clemson University - Department of Finance ( email )

425 Sirrine Hall
Clemson, SC 29634
United States

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