The Economic Value of Timing Higher Order (Co-)Moments in Bull and Bear Markets

58 Pages Posted: 28 Feb 2014

See all articles by Massimo Guidolin

Massimo Guidolin

University of Liverpool Management School; Bocconi University - CAREFIN - Centre for Applied Research in Finance

Giovanna Nicodano

University of Turin - Department ESOMAS; Collegio Carlo Alberto; CEPR; EGCI; Netspar

Date Written: September 1, 2013

Abstract

We examine the ex-post performance of optimal portfolios with predictable returns, when the investor horizon ranges from one month to ten years. Due to the investor’s ability to forecast shifts between bull and bear markets, predictability involves the risk premium, volatility and correlations, and may extend to third and fourth moments. We analyze three different equity portfolios data sets, each covering more than eight indexes, including commonly used US Industry and International Book-to-Market portfolios. Allowing for regimes improves portfolio performance for at least a subset of investment horizons and in all data sets. Despite substantial non-normalities in both the Industry and the book-to-market data sets, gains from predicting higher order moments obtain only in the latter. However, tracking and forecasting bull and bear markets turns out to improve realized portfolio performance more generally. The equally weighted strategy leads to lower ex-post performance measures than optimizing ones.

Keywords: equity market regimes, bull and bear states, return predictability, skewness and kurtosis, equity portfolio diversification.

JEL Classification: G11, F37, C22, C51.

Suggested Citation

Guidolin, Massimo and Nicodano, Giovanna, The Economic Value of Timing Higher Order (Co-)Moments in Bull and Bear Markets (September 1, 2013). Available at SSRN: https://ssrn.com/abstract=2401174 or http://dx.doi.org/10.2139/ssrn.2401174

Massimo Guidolin

University of Liverpool Management School ( email )

Bocconi University - CAREFIN - Centre for Applied Research in Finance

Via Sarfatti 25
Milan, 20136
Italy

Giovanna Nicodano (Contact Author)

University of Turin - Department ESOMAS ( email )

Turin, 10134
Italy

HOME PAGE: http://https://www.carloalberto.org/person/giovanna-nicodano/

Collegio Carlo Alberto ( email )

Piazza Arbarello 8
Torino, Torino 10121
Italy
390116705006 (Phone)

HOME PAGE: http://https://www.carloalberto.org/person/giovanna-nicodano

CEPR ( email )

London
United Kingdom

EGCI ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

Netspar ( email )

P.O. Box 90153
Tilburg, 5000 LE
Netherlands

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