For small-cap U.S. stocks vs. Treasury bills, the net-Sharpe-optimal SMA crossover (25-day long SMA) uses a shorter lookback that rises irregularly with trading frictions, and matches SMA25 alone below 0.3% frictions (1952–2021; daily data; 0–1% frictions).
Is there an optimal net (incorporating trading frictions) trend-following strategy for broad stock portfolios? In their November 2022 paper entitled "Optimal Trend-Following With Transaction Costs", Valeriy Zakamulin and Javier Giner develop and test a simple model that incorporates short-term return persistence (trend) and trading frictions (half bid-ask spread, fees and impact of trading). Their trend-following strategy switches between a stock portfolio and the risk-free asset (Treasury bills). They model trend as typically positive, linearly decreasing daily return autocorrelations for lags up to 25 trading days. For empirical tests, they focus on small-capitalization U.S. stocks (bottom fifth of market capitalizations). Based on past studies, they test 1-way proportional trading frictions in the range 0% to 1%. Using theoretical analyses and daily returns for small stocks/Treasury bill yields during January 1952 through December 2021, they find that:
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