Momentum Trading with the ℓ1‐Filter: Are the Markets Efficient?

Mitra, Subrata K and Rohit, Abhishek Kumar (2018) Momentum Trading with the ℓ1‐Filter: Are the Markets Efficient? International Review Of Finance.

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Abstract

This paper explores the possibility of generating consistent momentum profits by trading on nine major indices across the globe using the ℓ1‐filter. This methodology penalizes slope reversion of the filtered trend and identifies piecewise linear trends in the asset prices. We find the buy strategy to offer considerably higher momentum returns compared to the sell strategy. Our strategy beats the buy‐and‐hold (BH) strategy on all fronts and, thus, highlights the inefficiencies in financial markets in recent years (2000–2016). Comparing the momentum profits across a set of advanced economies (AEs) and emerging market economies (EMEs), we find that the developed and efficient financial markets of the AEs provide lower opportunities for momentum profits. The momentum profits are more than double in the EMEs as compared to the AEs. Highlighting the instability of the momentum strategy in different market states by using the global financial crisis (GFC) as a turning point, we further find that considerable opportunity exists for momentum strategies in the bullish runs that precede the crisis, as happened before the GFC. However, the momentum profits reduce significantly as the crisis sets in, increasing the degree of market uncertainty, fear, and risk‐aversiveness.

Item Type:	Article
Uncontrolled Keywords:	trading;asset pricing
Subjects:	Finance Finance > Capital Markets/Stock Marketing
Divisions:	Finance and Strategy
Depositing User:	Mr Ramesh Kamath
Date Deposited:	13 Jun 2019 10:13
Last Modified:	13 Jun 2019 10:21
URI:	http://tapmi.informaticsglobal.com/id/eprint/623

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