Time series momentum trading strategy and autocorrelation amplification

K. J. Hong and S. Satchell

Quantitative Finance, 2015, vol. 15, issue 9, 1471-1487

Abstract: This paper investigates why general Moving Average (MA) trading rules are widely used by technical analysts and others. We assume general stationary processes for prices and we derive the autocorrelation function for an MA trading rule. Based on our results, we conjecture that autocorrelation amplification is one of the reasons why such trading rules are popular. Using simulated results, we show that the MA rule may be popular because it can identify price momentum and is a simple way of assessing and exploiting the price autocorrelation structure without necessarily knowing its precise structure. This paper then, provides empirical evidence of autocorrelation amplification using 15-year daily price data for 11 major international stock indices.

Date: 2015
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DOI: 10.1080/14697688.2014.1000951

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