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.
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Notes
Calculations with the one-month U.S. treasury bill rate as the risk-free rate of return are available upon request.
Market-specific calculations are available upon request.
Market-specific calculations are available upon request.
Note that the moving average technique uses prices, but there have to be returns in the regression analysis to restore stationarity. Thus, any straight comparisons between MA lags and return lags are useless.
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I greatly acknowledge the helpful comments of Hannu Laurila, the editor, and two anonymous referees.
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Ilomäki, J. Risk and return of a trend-chasing application in financial markets: an empirical test. Risk Manag 20, 258–272 (2018). https://doi.org/10.1057/s41283-018-0036-1
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DOI: https://doi.org/10.1057/s41283-018-0036-1