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The Moving Average Ratio and Momentum

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  • Seung‐Chan Park

Abstract

I show the ratio of the short‐term moving average to the long‐term moving average (moving average ratio, MAR) has significant predictive power for future returns. The MAR combined with nearness to the 52‐week high explains most of the intermediate‐term momentum profits. This suggests that an anchoring bias, in which investors use moving averages or the 52‐week high as reference points for estimating fundamental values, is the primary source of momentum effects. Momentum caused by the anchoring bias do not disappear in the long‐run even when there are return reversals, confirming that intermediate‐term momentum and long‐term reversals are separate phenomena.

Suggested Citation

  • Seung‐Chan Park, 2010. "The Moving Average Ratio and Momentum," The Financial Review, Eastern Finance Association, vol. 45(2), pages 415-447, May.
    • Handle: RePEc:bla:finrev:v:45:y:2010:i:2:p:415-447
    DOI: 10.1111/j.1540-6288.2010.00254.x
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    Cited by:

    1. Liao, Li-Chuan & Chou, Ray Yeutien & Chiu, Banghan, 2013. "Anchoring effect on foreign institutional investors’ momentum trading behavior: Evidence from the Taiwan stock market," The North American Journal of Economics and Finance, Elsevier, vol. 26(C), pages 72-91.
    2. Basu, Devraj & Miffre, Joëlle, 2013. "Capturing the risk premium of commodity futures: The role of hedging pressure," Journal of Banking & Finance, Elsevier, vol. 37(7), pages 2652-2664.
    3. Li-Chuan Liao & Tzu-Pu Chang & Ping-Huang Wang, 2023. "Earnings Management Ethicality and Application in the Kenyan Public Sector: A Critical Review," International Journal of Business and Economic Sciences Applied Research (IJBESAR), International Hellenic University (IHU), Kavala Campus, Greece (formerly Eastern Macedonia and Thrace Institute of Technology - EMaTTech), vol. 16(1), pages 71-86, October.
    4. Gizelle D. Willows & Daniel W. Richards, 2023. "Buy and buy again: The impact of unique reference points on (re)purchase decisions," International Review of Finance, International Review of Finance Ltd., vol. 23(2), pages 301-316, June.

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