Risk and return of a trend-chasing application in financial markets: an empirical test
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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.
KeywordsValue-at-Risk Expected shortfall Volatility Investment decision Stock returns
JEL ClassificationG02 G11 G32
I greatly acknowledge the helpful comments of Hannu Laurila, the editor, and two anonymous referees.
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Conflict of interest
The author declares that he has no conflict of interest.