Market volatility and the trend factor

Ming Gu, Minxing Sun, Zhitao Xiong and Weike Xu

Finance Research Letters, 2024, vol. 65, issue C

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.

Keywords: Market volatility; Trend factor; Time-series variation; Information uncertainty (search for similar items in EconPapers)
JEL-codes: G11 G12 G14 (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:eee:finlet:v:65:y:2024:i:c:s1544612324006251

DOI: 10.1016/j.frl.2024.105595

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