A review on trend factor: examination of the trend factor’s performance with skipping period

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Journal Title
Journal ISSN
Volume Title
School of Business | Master's thesis
Date
2018
Major/Subject
Mcode
Degree programme
Finance
Language
en
Pages
61+1
Series
Abstract
Han, Zhou and Zhu (2016) proposed a trend factor to capture all the short-, mid- and long-term information which represents the well-known short-term reversal factor, the momentum factor and the long-term reversal factor. HZZ documented the superiority performance of the trend factor with its high and consistent abnormal return. Based on HZZ’s approach, this study provides some further examinations on the trend factor’s performance with the skipping period. The skipping period is widely used by related studies in order to mitigate bid-ask spread bias and avoid the opposite effects from shorter-term factors. The skipping period also provides a practical setup which considers the real-life trades execution issues. The study finds that with the skipping period, the performance of the trend factor largely declines and its superiority over other factors disappears. The trend factor’s monthly average return drops from 1.69% by more than 0.50% when the 1-day skipping periods are applied, and after applying the 5-day and 20-day skipping periods the return becomes lower than that of the short-term reversal factor and the momentum factor. The study also shows such impacts of skipping period over the trend factor is mainly due to the short-term reversal factor, and especially the 5-day lag of the trend factor, which accounts for 0.82% out of 1.69% of the trend factor’s return.
Description
Thesis advisor
Nyberg, Peter
Keywords
trend factor, skipping period, short-term reversal, momentum, long-term reversal, factors, moving average
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