Trend Following, 5th Edition

20 Two Centuries of Trend Following

Yves Lempérière, Cyril Deremble, Philip Seager, 
Marc Potters, and Jean-Philippe Bouchaud

Capital Fund Management

We establish the existence of anomalous excess returns based on trend-following strategies across four asset classes (commodities, currencies, stock indexes, and bonds) and over very long time scales. We use for our studies both futures time series that have existed since 1960 and spot time series that allow us to go back to 1800 on commodities and indexes. The overall t-statistic of the excess returns is approximately equal to five since 1960 and approximately equal to 10 since 1800, after accounting for the overall upward drift of these markets. The effect is very stable, across both time and asset classes. It makes the existence of trends one of the most statistically significant anomalies in financial markets. When analyzing the trend-following signal further, we find a clear saturation effect for large signals, suggesting that fundamentalist traders do not attempt to resist “weak trends,” but step in when their own signal becomes strong enough. Finally, we study the performance of trend following in the recent period. We find no sign of a statistical degradation of long trends, whereas shorter trends have significantly withered.

Introduction

Are markets efficient, in the sense that all public information is included in current prices? If this were so, price changes would be totally unpredictable in the sense that no systematic ...