“In this paper, we document that an application of the moving averages (a popular form of technical analysis) to portfolios sorted by volatility generates investment timing portfolios that outperform the buy-and-hold strategy greatly, with returns that have negative or little risk exposures on the market factor and the Fama-French SML and HML factors. As a result, the abnormal returns, relative to the CAPM and the Fama-French three-factor models, are high, and higher than those from the momentum strategy for high decile portfolios. The abnormal returns remain high even after accounting for transaction costs. While the moving average is a trend following strategy as the momentum, its performance has little correlation with the momentum, and behaves differently over business cycles, default and liquidity risks.”
Read the full paper here.
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.