Risk and return of a trend-chasing application in financial markets: an empirical test

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Abstract

The paper introduces an application of the moving average trend-chasing rule that effectively reduces the risk of portfolios. The results are fairly robust: all our moving average lags produce about 36% (34%) less Value-at-Risk and about 31% (30%) less expected shortfall without giving up any returns on average after transaction costs compared to the buy-and-hold strategy, calculated in local currencies (in U.S. dollars). In addition, the paper finds that the volatility of returns follows a similar pattern by producing on average 29% (30%) less volatility in local currencies (in U.S. dollars). Moreover, the CAPM betas of the trading rule are significantly lower (50%) than in the buy-and-hold strategy.

Keywords

Value-at-Risk Expected shortfall Volatility Investment decision Stock returns 

JEL Classification

G02 G11 G32 

Notes

Acknowledgements

I greatly acknowledge the helpful comments of Hannu Laurila, the editor, and two anonymous referees.

Compliance with ethical standards

Conflict of interest

The author declares that he has no conflict of interest.

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Copyright information

© Macmillan Publishers Ltd., part of Springer Nature 2018

Authors and Affiliations

  1. 1.Faculty of ManagementUniversity of TampereTampereFinland

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