Time Series Reversal of Financial Assets

Abstract

A reversal pattern in the time series context from 12 to 24 months after the formation of trend following signals is observed. By decomposing the trend following strategy returns according to their performance, we find that instruments with sell signals in the trend following portfolio (i.e. losers) contribute to this type of reversal, even if their profits are not realised. The instruments with buy signals in the trend following portfolio (i.e. winners) contribute much less. More specifically, the sub-portfolio which consists of loser instruments in a trend following strategy which later shows positive returns, i.e. the fault losers, continue to provide a significant alpha which is immune to momentum risks. A double-sorted strategy combining both time series continuation and reversal yield to an average return of 18% per annum, which is significantly higher compared to the trend following strategies.