Journal of Financial Economics Vol. 122 No. 2 2016
A trend factor: Any economic gains from using information over investment horizons?
Abstract
In this paper, we provide a trend factor that captures simultaneously all three stock price trends: the short-, intermediate-, and long-term, by exploiting information in moving average prices of various time lengths whose predictive power is justified by a proposed general equilibrium model. It outperforms substantially the well-known short-term reversal, momentum, and long-term reversal factors, which are based on the three price trends separately, by more than doubling their Sharpe ratios. During the recent financial crisis, the trend factor earns 0.75% per month, while the market loses −2.03% per month, the short-term reversal factor loses −0.82%, the momentum factor loses −3.88%, and the long-term reversal factor barely gains 0.03%. The performance of the trend factor is robust to alternative formations and to a variety of control variables. From an asset pricing perspective, it also performs well in explaining cross-section stock returns.
- DOI
- 10.1016/j.jfineco.2016.01.029
- Volume
- 122
- Issue
- 2
- Pages
- 352-375
- Language
- en
- Sources
- openalex crossref bibtex:phds-export.bib