Time series reversal in trend‐following strategies

Abstract

Abstract This paper empirically studies the reversal pattern following the formation of trend‐following signals in the time series context. This reversal pattern is statistically significant and usually occurs between 12 and 24 months after the formation of trend‐following signals. Employing a universe of 55 liquid futures, we find that instruments with sell signals in the trend‐following portfolio (‘losers’) contribute to this type of reversal, even if their profits are not realised. The instruments with buy signals in the trend‐following portfolio (‘winners’) contribute much less. A double‐sorted investment strategy based on both return continuation and reversal yields to portfolio gains which are significantly higher than that of the corresponding trend‐following strategy.