Market Timing with Moving Average Distance: International Evidence

Abstract

We explore the ability of the distance between short- and long-run moving averages, called MAD, to predict future returns of international market-wide indices. MAD portfolios yield abnormal profits after transaction costs, which do not reverse in the long run. This suggests that anchoring to long-run moving averages is a global phenomenon that applies also to market-wide indices. The annualized MAD portfolios' alpha values are double-digit with Sharpe ratios significantly higher than those of the global benchmarks. Similar results for developed economies and developed markets indicate that international diversification is still effective and offers significant economic benefits even among developed countries.

Keywords: moving average, anchoring, international markets, trading strategies, abnormal profits

JEL Classification: G11, G12, G15