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Market volatility and the trend factor

Author

Listed:
  • Gu, Ming
  • Sun, Minxing
  • Xiong, Zhitao
  • Xu, Weike

Abstract

This paper investigates how stock market volatility predicts trend factor profits. We find that the trend factor performs significantly better following high market volatility periods. From 1931 to 2022, the average monthly risk adjusted return following high volatility periods is 2.47 %, significantly higher than that following low volatility periods. We hypothesize that fundamental signals are more likely to be imprecise when the stock market is more volatile, leading investors to rely more heavily on trend signals. Consequently, the trend factor could deliver higher profits. Collectively, our paper suggests that market volatility is an important time-series determinant of trend factor performance.

Suggested Citation

  • Gu, Ming & Sun, Minxing & Xiong, Zhitao & Xu, Weike, 2024. "Market volatility and the trend factor," Finance Research Letters, Elsevier, vol. 65(C).
    • Handle: RePEc:eee:finlet:v:65:y:2024:i:c:s1544612324006251
    DOI: 10.1016/j.frl.2024.105595
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    More about this item

    Keywords

    Market volatility; Trend factor; Time-series variation; Information uncertainty;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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