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.
- General Economics, Econometrics and Finance