THE CROSS SECTIONAL PROFITABILITY OF TECHNICAL ANALYSIS
Interesting paper here courtesy of Mebane Faber at World Beta. The authors argue that trend following (see here) is a viable strategy:
“In this paper, we document that an application of the moving averages (a popular form of technical analysis) to portfolios sorted by volatility generates investment timing portfolios that outperform the buy-and-hold strategy greatly, with returns that have negative or little risk exposures on the market factor and the Fama-French SML and HML factors. As a result, the abnormal returns, relative to the CAPM and the Fama-French three-factor models, are high, and higher than those from the momentum strategy for high decile portfolios. The abnormal returns remain high even after accounting for transaction costs. While the moving average is a trend following strategy as the momentum, its performance has little correlation with the momentum, and behaves differently over business cycles, default and liquidity risks.”
Read the full paper here.
Ah, so technical analysis works. Well, I guess now that it’s been proven to work it will no longer work.
As an aside, I absolutely can’t stand that academic techno-mumbo-jumbo writing style used by the authors above. The point of communication is to get your point across. This crap is almost as bad as the unintelligible crap lawyers write. No, worse, since lawyers at least are purposefully trying to obfuscate.
To be fair, the point of the academic mumbo-jumbo is that is allows the writers to express something very precise to other practitioners. Colloquial language — what all of the rest of us speak — is imprecise and subject to interpretation.
It also serves to exclude, either through ignorance or boredom, the rest of us. Jargon in every field is a method of separating the priests from the peasants.
I question your assumptions that 1) speaking plainly is less precise than academic mumbo-jumbo, and 2) the idea that exclusion serves some useful purpose. Often, I’ve found that jargon is used to mask the fact that people really don’t understand the central idea of what they’re talking about. That may not be the case here, but I find it unnecessary nonetheless.
Speaking plainly is less precise than ‘academic’ speech. Mathematics has developed almost its own language in the pursuit of precision.
In less “academic” speech:
http://www.cxoadvisory.com/volatility-effects/combining-realized-volatility-and-simple-moving-averages/
Enjoy!