On the Expected Performance of Market Timing Strategies

The Journal of Portfolio Management Summer 2014, Vol. 40, No. 4: pp. 42-51

Posted: 16 Jul 2011 Last revised: 23 Aug 2014

Winfried G. Hallerbach

Robeco Asset Management, Quantitative Investment Research

Date Written: July 15, 2011

Abstract

We derive expressions for the Information Ratio (IR) that can be expected from directional market timing strategies. Our results hold as accurate 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 markets) because they contribute differently to performance. We show 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 markets, increases 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 equities and fixed income.

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

JEL Classification: C13, C14, C52, G11

Suggested Citation

Hallerbach, Winfried G., On the Expected Performance of Market Timing Strategies (July 15, 2011). The Journal of Portfolio Management Summer 2014, Vol. 40, No. 4: pp. 42-51. Available at SSRN: https://ssrn.com/abstract=1887264 or http://dx.doi.org/10.2139/ssrn.1887264

Winfried George Hallerbach (Contact Author)

Robeco Asset Management, Quantitative Investment Research ( email )

Weena 850
Rotterdam, 3014 DA
Netherlands
+31102242316 (Phone)

HOME PAGE: http://www.robeco.com/quant

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