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On the Expected Performance of Market Timing Strategies

Winfried G. Hallerbach

Robeco Asset Management, Quantitative Strategies

July 15, 2011

We derive expressions for the Information Ratio (IR) that can be expected from market timing strategies in non-parametric and parametric settings. Our results hold as superior approximations and lift Grinold’s [1989] “Fundamental Law of Active Management” to an operational level. In addition, we separate “time series breadth” (the timing frequency per strategy) from “cross-section breadth” (the number of separate sub-strategies) because they contribute differently to performance. We provide theoretical proofs that implementing volatility-weighted bet sizes, both in the time series context of a single underlying market and in the cross-section context of multiple underlying markets, maximizes the expected timing IR. Our theoretical results can be used as a benchmark for and reality check on the back tested performance of timing strategies. We confirm the accuracy of our results by simulating timing strategies for currencies, equities and fixed income.

Number of Pages in PDF File: 35

Keywords: risk-adjusted performance, information ratio, market timing, volatility-weighting

JEL Classification: C13, C14, C52, G11

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Date posted: July 16, 2011 ; Last revised: August 11, 2011

Suggested Citation

Hallerbach, Winfried G., On the Expected Performance of Market Timing Strategies (July 15, 2011). Available at SSRN: http://ssrn.com/abstract=1887264 or http://dx.doi.org/10.2139/ssrn.1887264

Contact Information

Winfried George Hallerbach (Contact Author)
Robeco Asset Management, Quantitative Strategies ( email )
Rotterdam, 3011 AG
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References:  35
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