Momentum: A New Look on the Old World

With the rapid growth of the stock market, many researchers examined the profitability and market efficiency of various trading strategies with the idea of Momentum Investing. This study optimizes the Moving Average Convergence-Divergence (MACD) oscillator and tests its performance under different trading strategies. The research simulates the trading process of 40 U.S. industry portfolios from 1926 to 2021 using different MACD oscillators constructed by the Exponential Moving Average (EMA) indicators of different decay parameters. To acquire the optimal MACD oscillator, the study performs the OLS linear regression analysis on each industry's stimulated excess returns and excess industry portfolio returns and uses the corresponding regression coefficients (alpha and beta) as the assessment criteria of the performance. To further optimize the model, the study improves the traditional trading strategy, the simple-crossover operation, to the n-day holding strategy, which aims to weaken the influence of false signals. The result shows that MACD strategies generally have positive alpha, hinting that investor can utilize this indicator to diversify portfolios and hedge their risks. © 2022 Association for Computing Machinery.