Technical Trading of Equity Factor Premiums

Do technical trend trading/intrinsic momentum strategies work for widely used equity factors such as size (small minus big market capitalizations), value (high minus low book-to-market ratios), profitability (robust minus weak), investment (conservative minus aggressive) and momentum (winners minus losers)? In their January 2018 paper entitled “What Goes up Must Not Come Down – Time Series Momentum in Factor Risk Premiums”, Maximilian Renz investigates time variation and trend-based predictability of these five factors and the market factor. He first constructs price series for the six long-short factor portfolios. He then considers seven rules based on a short simple moving average (SMA) crossing above (bullish) or below (bearish) a long SMA measured in trading days: SMA(1, 20), SMA(1, 40), SMA(1, 120), SMA(1, 180), SMA(1, 240), SMA(20, 180) and SMA(20, 240). He also considers two intrinsic (absolute or time series) momentum rules based on change in price over the past 180 or 240 trading days (positive bullish and negative bearish). Motivated by prior research by others, he focuses on SMA(1, 180), daily price crossing its 180-day SMA. He measures trend-based statistical predictability of factor premiums and investigates economic value via a strategy that levers factor exposures between 0 and 1.5 using trend-based signals. Finally, he examines whether incorporating trend information improves accuracies of 1-factor (market), 3-factor (adding size and value) and 5-factor (further adding profitability and investment) models of stock returns. Using daily returns for the six selected U.S. stock market equity factors and for 30 industries during July 1963 through December 2015, he finds that: (more…)