Moving average distance as a predictor of equity returns

In: Review of financial economics: RFE, Band 39, Heft 2, S. 127-145

Abstract

AbstractThe 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.