Two centuries of trend following

Abstract

We establish the existence of anomalous excess returns based on trend following strategies across four asset classes (commodities, currencies, stock indices, bonds) and over very long time scales. We use for our studies both futures time series, that exist since 1960, and spot time series that allow us to go back to 1800 on commodities and indices. The overall t-stat of the excess returns is ≈ 5 since 1960 and ≈ 10 since 1800, after accounting for the overall upward drift of these markets. The effect is very stable, both across time and asset classes. It makes the existence of trends one of the most statistically significant anomalies in financial markets. When analyzing the trend following signal further, we find a clear saturation effect for large signals, suggesting that fundamentalist traders do not attempt to resist "weak trends", but step in when their own signal becomes strong enough. Finally, we study the performance of trend following in the recent period. We find no sign of a statistical degradation of long trends, whereas shorter trends have significantly withered.

Two Centuries of Price-Return Momentum

“…A recently updated study of both the value and the momentum effects (Asness, Moskowitz, and Pedersen 2013) traces the power of the momentum effect around the globe. The momentum effect has also been confirmed in 19th-century British and Russian stock prices (Chabot, Ghysels, and Jagannathan 2008;Goetzmann and Huang 2015) and in two centuries of multiasset trend following by Lempérière, Deremble, Seager, Potters, and Bouchaud (2014).…”

Agnostic risk parity: taming known and unknown unknowns

“…As an example, we consider here the universal "Trend" indicator, based on a 1-year flat moving average of past returns of a collection of 110 futures contracts (commodities, FX, indices, bonds and interest rates) -see the discussion in [18]. We normalize the returns of all futures and all the predictors to have unit variance.…”

Forecasting Trends with Asset Prices

“…In this case, future returns are not predictable. Nevertheless, people have divergent views on the subject and trend following strategies are the principal sources of returns for Commodity Trading Advisors (see [21]). Furthermore, most quantitative strategies are based on the assumption of trends extracted from the asset prices (see [24], [26]).…”