This paper is a part of my dissertation at University of Tennessee, Knoxville. I would like to thank Philip Daves, James W. Wansley, and Michael C. Ehrhardt for their insightful comments. I have benefited from discussions with Bruce R. Swensen. I am also grateful to a former editor (Arnold R. Cowan) and two anonymous referees for their helpful comments and Ying Zhang for his comments at 2006 Financial Management Association Meetings.
The Moving Average Ratio and Momentum
Article first published online: 16 APR 2010
© 2010, The Eastern Finance Association
Volume 45, Issue 2, pages 415–447, May 2010
How to Cite
Park, S.-C. (2010), The Moving Average Ratio and Momentum. Financial Review, 45: 415–447. doi: 10.1111/j.1540-6288.2010.00254.x
- Issue published online: 16 APR 2010
- Article first published online: 16 APR 2010
- moving average;
- 52-week high;
- anchoring bias;
- behavioral theory;
- efficient market hypothesis
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.