The Moving Average Ratio and Momentum


  • 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.

Corresponding author: School of Business, Adelphi University, 1 South Ave., Garden City, NY 11530-0701; Phone: (516) 877-4454; Fax: (516) 877-4607; E-mail:


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.