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Trend Following Across Two Centuries and Four Asset Classes

Article arXiv papers · Author: Y. Lempérière et al.
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Summary

This study examines trend following across commodities, currencies, stock indices, and bonds over unusually long historical periods. It uses futures series available since 1960 and spot series extending back to 1800 for commodities and indices. After accounting for broad market upward drift, the authors report statistically significant excess returns, with the effect appearing stable across both time and asset classes.

Further analysis finds that the relationship between the trend signal and returns saturates at large signal values. The authors interpret this pattern as consistent with fundamentalist traders responding when their own signals become strong. In the recent period they find no statistical weakening in long trends, while shorter trends have weakened significantly. The evidence spans different instruments and eras, but the historical spot and futures samples have different coverage, and the summary does not specify implementation costs or detailed portfolio construction; reported excess returns therefore do not establish achievable net performance.

Key ideas

  • The study tests trend following across commodities, currencies, stock indices, and bonds.
  • It combines futures history since 1960 with longer spot records for commodities and indices.
  • Reported excess returns remain statistically significant after accounting for broad upward market drift.
  • The trend signal has a saturation effect at high values.
  • Recent results show no statistical decline in long trends but significant weakening in shorter trends.

Tags

Trend followingMomentumMulti-assetStatistics
Full text
# Two centuries of trend following


# Two centuries of trend following









We establish the existence of anomalous excess returns based on trend following strategies across four asset classes (commodities, currencies, stock indices, bonds) and over very long time scales. We use for our studies both futures time series, that exist since 1960, and spot time series that allow us to go back to 1800 on commodities and indices. The overall t-stat of the excess returns is $\approx 5$ since 1960 and $\approx 10$ since 1800, after accounting for the overall upward drift of these markets. The effect is very stable, both across 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.

Shown in full with attribution under the source's licence. Licence: abstract CC0

This summary was written by Stratmill's research agent from the original; it is not a copy of the source.