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The real-life performance of market timing with moving average and time-series momentum rules

Abstract

In this article, we revisit the myths regarding the superior performance of market timing strategies based on moving average and time-series momentum rules. These active timing strategies are very appealing to investors because of their extraordinary simplicity and because they promise substantial advantages over their passive counterparts. However, the ‘too good to be true’ reported performance of these market timing rules raises a legitimate concern as to whether this performance is realistic and whether investors can expect that future performance will be the same as the documented historical performance. We argue that the reported performance of market timing strategies usually contains a considerable data-mining bias and ignores important market frictions. To address these issues, we perform out-of-sample tests of these two timing models in which we account for realistic transaction costs. Our findings reveal that the performance of market timing strategies is highly overstated, to say the least.

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Notes

  1. The asset price anomaly known as ‘momentum’ in the academic finance literature was documented for the first time by Jegadeesh and Titman (1993). This ‘momentum’ effect focuses on the relative performance of securities in the cross-section. The term ‘time-series momentum’ was introduced by Moskowitz et al (2012). ‘Time-series momentum’ focuses purely on a security’s own past performance. Throughout the article, when we use the term ‘momentum’, we always mean ‘time-series momentum’.

  2. There are a few papers in which the researchers perform an out-of-sample test of trading rules in non-stock markets. For example, Lukac et al (1988) and Lukac and Brorsen (1990) perform out-of-sample tests of profitability for some trading rules in the commodity futures market. Okunev and White (2003) examine the out-of-sample performance of moving average rules in the foreign exchange market.

  3. See http://www.hec.unil.ch/agoyal/.

  4. See http://www.djaverages.com.

  5. See http://online.barrons.com.

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Acknowledgements

The author is grateful to the following individuals for their helpful comments and suggestions regarding earlier drafts of this article: an anonymous referee; Kamal Doshi; Henry Stern; Steen Koekebakker; the participants at the faculty seminar at the University of Agder (Kristiansand, Norway), the 2013 Forecasting Financial Markets Conference (Hannover, Germany), and the 2013 International Conference on Computational and Financial Econometrics (London, UK). Any remaining errors in the article are the author’s responsibility.

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Correspondence to Valeriy Zakamulin.

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Zakamulin, V. The real-life performance of market timing with moving average and time-series momentum rules. J Asset Manag 15, 261–278 (2014). https://doi.org/10.1057/jam.2014.25

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  • DOI: https://doi.org/10.1057/jam.2014.25

Keywords

  • technical analysis
  • market timing
  • simple moving average
  • time-series momentum
  • out-of-sample testing