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The Moving Average Ratio and Momentum

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  • Seung-Chan Park
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    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. Copyright (c) 2010, The Eastern Finance Association.

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    Bibliographic Info

    Article provided by Eastern Finance Association in its journal Financial Review.

    Volume (Year): 45 (2010)
    Issue (Month): 2 (05)
    Pages: 415-447

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    Handle: RePEc:bla:finrev:v:45:y:2010:i:2:p:415-447

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    Web page: http://www.easternfinance.org/
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    Cited by:
    1. 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.
    2. 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.

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