Breaking Bad Trends

We document and quantify the negative impact of trend breaks (i.e., turning points in the trajectory of asset prices) on the performance of standard monthly trend-following strategies across several assets and asset classes. In the years of the US economy’s expansion following the global financial crisis of 2008, we find an increase in the frequency of trend breaks, which helps explain the lower performance of these trend strategies during this period. We illustrate how to repair such strategies using a dynamic trend-following approach that exploits the return-forecasting properties of the two types of trend breaks: market corrections and rebounds.

Duke Scholars

Author Campbell R. Harvey Fuqua School of Business