Black Swans and Market Timing: How Not to Generate Alpha

20 Pages Posted: 28 Nov 2007  

Javier Estrada

IESE Business School

Abstract

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.

Keywords: outliers, performance, normality, market timing, alpha

JEL Classification: G11

Suggested Citation

Estrada, Javier, Black Swans and Market Timing: How Not to Generate Alpha. Available at SSRN: https://ssrn.com/abstract=1032962 or http://dx.doi.org/10.2139/ssrn.1032962

Javier Estrada (Contact Author)

IESE Business School ( email )

IESE Business School
Av. Pearson 21
Barcelona, 08034
Spain
+34 93 253 4200 (Phone)
+34 93 253 4343 (Fax)

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