The market timing power of moving averages: evidence from US REITs and REIT indexes
Date
2014
Authors
Glabadanidis, P.
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International Review of Finance, 2014; 14(2):161-202
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Paskalis Glabadanidis
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<jats:title>Abstract</jats:title><jats:p>I present evidence that a moving average (MA) trading strategy dominates buying and holding the underlying asset in a mean‐variance sense using monthly returns of value‐weighted and equal‐weighted <jats:styled-content style="fixed-case">US REIT</jats:styled-content> indexes over the period <jats:styled-content style="fixed-case">J</jats:styled-content>anuary 1980 until <jats:styled-content style="fixed-case">D</jats:styled-content>ecember 2010. The abnormal returns are largely insensitive to the four <jats:styled-content style="fixed-case">C</jats:styled-content>arhart factors and produce economically and statistically significant alphas of between 10 and 15% per year after transaction costs. This performance is robust to different lags of the MA and in subperiods while investor sentiment, liquidity risks, business cycles, up and down markets, and the default spread cannot fully account for its performance. The <jats:styled-content style="fixed-case">MA</jats:styled-content> strategy works just as well with randomly generated returns and bootstrapped returns. The substantial market timing ability of the MA strategy appears to be the main driver of the abnormal returns. The returns to the <jats:styled-content style="fixed-case">MA</jats:styled-content> strategy resemble the returns of an imperfect at‐the‐money protective put strategy relative to the underlying portfolio. The lagged signal to switch has substantial predictive power over the subsequent return of the <jats:styled-content style="fixed-case">REIT</jats:styled-content> index. The MA strategy avoids the sharp downturn at the beginning of 2008 and substantially outperforms the cumulative returns of the buy‐and‐hold strategy using all of the 20 <jats:styled-content style="fixed-case">REIT</jats:styled-content> indexes. The results from applying the MA strategy with 274 individual <jats:styled-content style="fixed-case">REITs</jats:styled-content> largely corroborate the findings for the <jats:styled-content style="fixed-case">REIT</jats:styled-content> indexes.</jats:p>
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© 2013 International Review of Finance Ltd. 2013