—The assumption of normality for the distribution
of daily stock price returns is the core of the modern portfolio
theory. This allows the correct estimation of Value at Risk. This
paper performs a long term normality test for the market and
finds that stock market returns are not in fact normally
distributed, supported also by previous literature. We then
analyze whether the distribution of daily returns for some
period allows us to make predictions for a trend continuation by
testing a simple strategy based on the distribution of previous
daily returns. We find that by taking into account the previous
trend one can achieve a much better risk-reward ratio while
investing. This leads us to conclude that trends have much
bigger importance in the market than it is currently recognized.
—Stock market, trend continuation, normal
distribution, price behavior.
A. Teder and P. Sander are with the University of Tartu, Estonia (e-mail:
Cite: A. Teder, P. Sander, and T. Mitt, "Trend Is Your Friend, or Is It: Empirical Evidence from 60-Year US Stock Market Data," International Journal of Trade, Economics and Finance vol.5, no.3, pp. 292-295, 2014.