Performance of moving average investment timing strategy in UK Stock Market: individual stocks versus portfolios

MUHAMMAD ISHFAQ AHMAD, Chohui Wang, Mudassar Hasan, Anika Sattar, Muneeb Ahmad, Ramiz Ur Rehman

Research output: Contribution to journalArticlepeer-review

Abstract

This paper aims to test whether moving average (MA) investment timing strategy is applicable on individual stocks, portfolios formed from these stocks, or both. Moreover, our objective is to compare the performance of MA strategy with a buy-and-hold strategy. The data on individual stocks listed on London Stock Exchange, United Kingdom (UK) is collected over the period starting from December 31, 1999, through February 29, 2016. For the same period, we use daily values of UK-DS Market-PRICE INDEX and 1-Month Treasury bill rate. The paper follows Han et al. (2013) to peruse our investigation. The study applies both MA and buy-and-hold strategies to individual stocks and portfolios sorted by volatility. Since most results are found insignificant, no evidence is found to support that one strategy is better than the other when applied to individual stocks. However, trading behavior and success ratios across groups provide mixed results, hinting slightly towards the failure of MA strategy. The pervasive noise in daily stock return data is the reason why MA strategy consistently produces insignificant results. Moreover, when applied to volatility-sorted portfolios, MA strategy substantially beats buy-and-hold strategy by yielding higher average return and risk-adjusted returns, lower standard deviations, large-and-positive skewness and Sharpe ratios, and much success ratios across portfolios. Both for individual stocks and portfolios, dynamics of returns and especially trading behavior suggest that the performance of MA strategy decreases with rising lag lengths, meaning MA signal weakens for a longer history.
Original languageEnglish
Pages (from-to)5-21
Number of pages17
JournalJournal of Economic and Social Studies
Volume7
Issue number2
DOIs
Publication statusPublished - 18 Sept 2018
Externally publishedYes

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