Swing Trading Signals


Since 2013

  • 100% Quantified, data-driven and Backtested
  • We always show our results!
  • Signals every day via our site or email
  • Cancel at any time!

Moving Average Distance as a Predictor of Equity Returns Explained

Last Updated on 10 February, 2024 by Rejaul Karim

Moving Average Distance as a Predictor of Equity Returns” is a comprehensive study by Avramov, Kaplanski, and Subrahmanyam, that probes into the potential of the Moving Average Distance (MAD), the disparity between short- and long-run moving averages of prices, as a predictor for future equity returns.

This research presents distinct findings, revealing that investment payoffs based on MAD, which are robust to reasonable trading costs faced by institutions, depict greater strength for the long side compared to the short counterpart.

Furthermore, these findings demonstrate that MAD predictability persists beyond other prominent anomalies such as momentum, 52-week highs, and profitability, portraying the noteworthy role of MAD in driving equity returns.

Abstract Of Paper

The 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.

Original paper – Download PDF

Here you can download the PDF and original paper of Moving Average Distance as a Predictor of Equity Returns.

(An option to download will come shortly)

Author

Doron Avramov
Reichman University – Interdisciplinary Center (IDC) Herzliyah

Guy Kaplanski
Bar-Ilan University – Graduate School of Business Administration

Avanidhar Subrahmanyam
University of California, Los Angeles (UCLA) – Finance Area; Financial Research Network (FIRN)

Conclusion

In wrapping up, “Moving Average Distance as a Predictor of Equity Returns” demonstrates that the Moving Average Distance (MAD), the gap between short- and long-term moving averages of prices, is a significant predictor of future equity returns.

The authors emphasize that this method not only yields an impressive approximate 9% annualized value-weighted alphas but also, spelbindlyingly, surpasses the predictive capacities of other prominent market anomalies.

Furthermore, the efficacy of MAD-based investments remarkably withstands reasonable institutional trading costs and yields stronger results on the long side relative to the short counterpart, cementing the value of MAD in predicting equity returns.

Related Reading:

Asset Pricing Anomalies and the Low-Risk Puzzle

Low Risk Anomalies?

FAQ

What is the main focus of the research paper “Moving Average Distance as a Predictor of Equity Returns”?

The main focus of the research paper is to investigate the potential of the Moving Average Distance (MAD), which represents the disparity between short- and long-run moving averages of prices, as a predictor for future equity returns. The authors examine the cross-section of equity returns and evaluate the strength of investment payoffs based on MAD. They aim to determine whether MAD can predict future returns and how its predictive power compares to other well-known market anomalies.

How does MAD compare to other market anomalies in terms of predictability?

The research suggests that MAD outperforms other prominent market anomalies in terms of predictability. The authors find that the predictive power of MAD goes beyond anomalies such as momentum, 52-week highs, profitability, and others. This indicates that MAD provides unique and valuable information for predicting equity returns, making it a noteworthy factor in the landscape of market anomalies.

What is the significance of MAD-based investment payoffs being stronger on the long side?

The significance of MAD-based investment payoffs being stronger on the long side implies that investors can potentially benefit more from incorporating MAD into their strategies for long positions. The asymmetry in strength between the long and short sides suggests that MAD is particularly effective in identifying opportunities for positive returns, reinforcing its role as a predictor for favorable equity returns.

You can find many more Research Papers here

Leave a Reply

{"email":"Email address invalid","url":"Website address invalid","required":"Required field missing"}

Monthly Trading Strategy Club

$42 Per Strategy

>

Login to Your Account



Signup Here
Lost Password