Black Swans and Market Timing: How Not to Generate Alpha
IESE Business School
Do investors obtain their long term returns smoothly and steadily over time, or is their long term performance largely determined by the return of just a few outliers? How likely are investors to successfully predict the best days to be in and out of the market? The evidence from 15 international equity markets and over 160,000 daily returns indicates that a few outliers have a massive impact on long term performance. On average across all 15 markets, missing the best 10 days resulted in portfolios 50.8% less valuable than a passive investment; and avoiding the worst 10 days resulted in portfolios 150.4% more valuable than a passive investment. Given that 10 days represent less than 0.1% of the days considered in the average market, the odds against successful market timing are staggering.
Number of Pages in PDF File: 20
Keywords: outliers, performance, normality, market timing, alpha
JEL Classification: G11working papers series
Date posted: November 28, 2007
© 2013 Social Science Electronic Publishing, Inc. All Rights Reserved.
This page was processed by apollo6 in 0.391 seconds