Timing the Stock Market: Does it Really Make No Sense?

47 Pages Posted: 29 Jul 2013 Last revised: 11 Aug 2015

See all articles by Hubert Dichtl

Hubert Dichtl

dichtl research & consulting GmbH

Wolfgang Drobetz

Hamburg University

Lawrence Kryzanowski

Concordia University, Quebec - John Molson School of Business

Date Written: March 2014

Abstract

Many private and institutional investors attempt to time the market and generate abnormal returns by periodically switching their portfolio allocations between the stock market and the cash market based on their return predictions. However, most academic studies emphasize that a successful market timing strategy requires a prediction accuracy that is usually not observable in reality. While existing studies evaluate the outcomes based on traditional return and risk measures, we develop a “simulated market timer” that does not require a specific forecast model and adopt a decision theoretic framework to compare market timing with a buy-and-hold strategy. Our bootstrap-based simulations show that market timing can even add value for some investors with only moderate prediction skills.

Keywords: Market timing, expected utility theory, regret theory, anticipated utility theory, cumulative prospect theory, bootstrap simulation

JEL Classification: G11, G12, G14

Suggested Citation

Dichtl, Hubert and Drobetz, Wolfgang and Kryzanowski, Lawrence, Timing the Stock Market: Does it Really Make No Sense? (March 2014). Available at SSRN: https://ssrn.com/abstract=2302218 or http://dx.doi.org/10.2139/ssrn.2302218

Hubert Dichtl

dichtl research & consulting GmbH ( email )

Am Bahnhof 7
65812 Bad Soden am Taunus
Germany

HOME PAGE: http://www.dichtl-rc.de

Wolfgang Drobetz

Hamburg University ( email )

Moorweidenstrasse 18
Hamburg, 20148
Germany

Lawrence Kryzanowski (Contact Author)

Concordia University, Quebec - John Molson School of Business ( email )

1455 de Maisonneuve Blvd. W.
Montreal, Quebec H3G 1M8
Canada

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