Academic Research

Trend salience, investor behaviours and momentum profitability

Academic Research | 29 October 2019

There is strong empirical evidence that investors have tendencies to extrapolate trends in time-series data. However, not all trends are extrapolated. It has been shown that when an investor considers a trend salient they will act as trend followers, however, when a trend is considered non-salient, they expect mean reversion. The issue of trend salience is important for momentum strategies.

This paper calculates a proxy for trend salience: the ratio of short-term (e.g. 3-months) geometric average rate of return to medium-term (e.g. 12-months) geometric average rate of return. A trend that is increasing is argued to be more salient than a trend that is decreasing. Using this proxy for trend salience, the authors construct a momentum strategy that excludes stocks with non-salient trends. This augmented momentum strategy is shown to have statistically higher returns than the traditional momentum strategy.

Click on the below link to read more about this research:
Academic Research

Hurst, G., & Docherty, P. (2015). Trend salience, investor behaviours and momentum profitability. Pacific-Basin Finance Journal35, 471-484..


Important information
Information provided here is general information only and current at the time of publication. The content of this research article is not to be reproduced without permission.

For more information please contact

Gary Adamson

Chief Executive Officer – Platypus Asset Management

[email protected]