Trading timing and the returns to trend-following

ABSTRACT

We document a negative impact of realistic trading timing on trend-following profits, across an international sample of equity indexes and stocks. The discount effect is substantial but reduces as trend signals become less accurate. The size of this trading timing bias is largely driven by the volatility of buy-and-hold returns and that of trend signals.

KEYWORDS:

• Trend-following
• time-series momentum
• trading timing
• predictability

JEL CLASSIFICATION:

• G12
• G14

Disclosure statement

No potential conflict of interest was reported by the author.

Notes

¹ This upper boundary is consistent with the parameterizations tested in Brock, Lakonishok, and LeBaron (1992), Sullivan, Timmermann, and White (1999), Moskowitz, Ooi, and Pedersen (2012), Han, Yang, and Zhou (2013), and Marshall, Nguyen, and Visaltanachoti (2017).

² These values also compare with an annualized mean net interest return of −0.74% for indexes and −0.68% for stocks.

Additional information

Funding

This work was supported by Romanian National Authority for Scientific Research and Innovation CNCS – UEFISCDI under [grant number PN-II-RU-TE-2014-4-1827].