Testing Moving Average Trading Strategies on ETFs

44 Pages Posted: 12 Mar 2018

See all articles by Jing-Zhi Huang

Jing-Zhi Huang

Pennsylvania State University - University Park - Department of Finance

Zhijian (James) Huang

Rochester Institute of Technology (RIT) - Department of Accounting and Finance

Date Written: March 12, 2018

Abstract

This paper tests the technical trading rule of moving average (MA) in a long-only portfolio using exchange traded funds (ETFs). We also propose a quasi-intraday version of the MA strategy (QUIMA) that allows investors to trade immediately upon observing MA crossover signals. We find that 1) this QUIMA strategy outperforms the traditional version of the MA strategy that only trades at the close of a trading day, when the long-term MA lag length is not too long, 2) the documented profitability of MA strategy on indices is greatly reduced on ETFs, mainly due to more frequent and larger opening gaps on ETF prices than those on indices, and 3) relative to the buy-and-hold strategy, MA strategies have lower return, but better risk-adjusted performance measures such as the CAPM alpha. In addition, we find that among various long-term MA lengths, the 10-day MA turns out to be overly exploited by investors as its performance is significantly lower than those of surrounding MA lengths. Overall, our findings indicate that profitability of the MA trading rule reduces on tradable ETFs than on non-tradable indices.

Keywords: Moving Average, Technical Trading Rules, Data-Snooping Bias, Exchange Traded Funds

JEL Classification: G11, G14, D83

Suggested Citation

Huang, Jing-Zhi Jay and Huang, Zhijian, Testing Moving Average Trading Strategies on ETFs (March 12, 2018). Available at SSRN: https://ssrn.com/abstract=3138690 or http://dx.doi.org/10.2139/ssrn.3138690

Jing-Zhi Jay Huang

Pennsylvania State University - University Park - Department of Finance ( email )

University Park, PA 16802
United States

HOME PAGE: http://www.personal.psu.edu/jxh56

Zhijian Huang (Contact Author)

Rochester Institute of Technology (RIT) - Department of Accounting and Finance ( email )

College of Business
105 Lomb Memorial Drive
Rochester, NY 14623-5608
United States

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