Concluding Remarks

There is overwhelming evidence that the switching MA strategy dominates in a mean—variance sense buying and holding any of the decile portfolios. The excess returns of the switching MA returns over buying and holding the underlying portfolios are relatively insensitive to the four Carhart (1997) factors and generate high statistically and economically significant alphas. In addition, abnormal returns for most deciles decline substantially after controlling for the dividend yield on the market portfolio, recessions, and up/down markets. This switching strategy does not involve any heavy trading when implemented with daily returns and very often has positive BETC, suggesting that it will be actionable for institutional investors. The findings are robust with respect to portfolio construction, various lag lengths of the MA, and alternative sets of portfolios. Last but not least, the lagged signal indicating whether the price has crossed the simple MA has substantial predictive power over the subsequent index return controlling for standard predictive variables mentioned previously. The risk-adjusted performance disappears only in the context of market-timing regressions in the framework of Henriksson—Merton (1981) where the downside market return is included as an additional factor and empirical asset pricing models with macroeconomic state variables. Hence, it appears that the success of the MA strategy does not represent an anomaly and is consistent with rational asset pricing.