Distance Between Fast and Slow Price SMAs and Equity Returns

Does the distance between fast and slow simple moving averages (SMA) of an equity price series expose the degree of surprising/informative news about the asset? In their February 2018 paper entitled “The Predictability of Equity Returns from Past Returns: A New Moving Average-Based Perspective”, Doron Avramov, Guy Kaplanski and Avanidhar Subrahmanyam investigate distance between fast and slow price series SMAs as predictors of equity (individual stocks, industry and country market) returns. They choose the 21-day SMA as fast and the 200-day SMA as slow and define the distance between them (Moving Average Distance, or MAD) as the ratio of the former to the latter. They hypothesize that future returns are a continuous function of MAD. They test their hypothesis by measuring future returns: (1) for U.S. stocks sorted into tenths (deciles) based on MAD; and, (2) for U.S. stocks, industries and country markets above and below several MAD thresholds. To assess uniqueness of MAD indications, they control for 18 firm characteristics and several past return variables across different lookback intervals. Using daily prices adjusted for splits and dividends for a broad sample of U.S. stocks priced at least $5, U.S. industry stock groups and country stock markets, and values of U.S. Treasury bill (T-bill) yields and control variables, during June 1977 through October 2015, they find that: (more…)