The Moving Average Ratio and Momentum Seung-Chan Park* Adelphi University Forthcoming, The Financial Review. Please monitor www.thefinancialreview.org for the publication schedule. Please consult the published version for exact wording and pagination before finalizing any verbatim quotes. I show the ratio of the short-term moving average to the long-term moving average (moving average ratio, MAR) has significant predictive power for future returns. The MAR combined with nearness to the 52-week high explains most of the intermediate-term momentum profits. This suggests that an anchoring bias, in which investors use moving averages or the 52-week high as reference points for estimating fundamental values, is the primary source of momentum effects. Momentum caused by the anchoring bias do not disappear in the long-run even when there are return reversals, confirming that intermediate-term momentum and long-term reversals are separate phenomena. Keywords: momentum; moving average; 52-week high; anchoring bias; behavioral theory; efficient market hypothesis JEL classification: G12, G14 * Corresponding author: School of Business, Adelphi University, Garden City, NY; E-mail:
[email protected]; Tel: (516) 877-4454. This paper is a part of my dissertation at University of Tennessee, Knoxville. I would like to thank Philip Daves, James W. Wansley, and Michael C. Ehrhardt for their insightful comments. I have benefited from discussions with Bruce R. Swensen. I am also grateful to the editor (Arnold R. Cowan) and two anonymous referees for their helpful comments and Ying Zhang for his comments at 2006 Financial Management Association Meetings. 1. Introduction This paper finds that the ratio of two variables commonly used in technical analysis – short- and long-term moving averages – has significant predictive power for future returns, and that this predictive power is distinct from the predictive power of either past returns, first reported by Jegadeesh and Titman (1993), or nearness of the current price to the 52- week high, reported by George and Hwang (2004).