Revisiting the Structure of Trend Premia: When Diversification Hides Redundancy

Alban Etienne, Jean-Jacques Ohana, Eric Benhamou, B\'eatrice Guez, Ethan Setrouk and Thomas Jacquot

Papers from arXiv.org

Abstract: Recent work has emphasized the diversification benefits of combining trend signals across multiple horizons, with the medium-term window-typically six months to one year-long viewed as the "sweet spot" of trend-following. This paper revisits this conventional view by reallocating exposure dynamically across horizons using a Bayesian optimization framework designed to learn the optimal weights assigned to each trend horizon at the asset level. The common practice of equal weighting implicitly assumes that all assets benefit equally from all horizons; we show that this assumption is both theoretically and empirically suboptimal. We first optimize the horizon-level weights at the asset level to maximize the informativeness of trend signals before applying Bayesian graphical models-with sparsity and turnover control-to allocate dynamically across assets. The key finding is that the medium-term band contributes little incremental performance or diversification once short- and long-term components are included. Removing the 125-day layer improves Sharpe ratios and drawdown efficiency while maintaining benchmark correlation. We then rationalize this outcome through a minimum-variance formulation, showing that the medium-term horizon largely overlaps with its neighboring horizons. The resulting "barbell" structure-combining short- and long-term trends-captures most of the performance while reducing model complexity. This result challenges the common belief that more horizons always improve diversification and suggests that some forms of time-scale diversification may conceal unnecessary redundancy in trend premia.

Date: 2025-10, Revised 2025-10
New Economics Papers: this item is included in nep-mac
References: Add references at CitEc
Citations:

Downloads: (external link)
http://arxiv.org/pdf/2510.23150 Latest version (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:arx:papers:2510.23150

Access Statistics for this paper

More papers in Papers from arXiv.org
Bibliographic data for series maintained by arXiv administrators ().