Are Market Returns Predictable?

54 Pages Posted: 11 Jul 2014 Last revised: 22 Apr 2019

See all articles by Jussi Keppo

Jussi Keppo

National University of Singapore - NUS Business School

Tyler Shumway

University of Michigan at Ann Arbor, The Stephen M. Ross School of Business

Daniel Weagley

Georgia Institute of Technology - Scheller College of Business

Date Written: January 31, 2019

Abstract

We assess the predictability of market returns by examining the persistence in the market timing ability of a large set of individual investors. Unlike studies examining returns or holdings of investment funds, a major benefit of our setting is we are able to observe the first order changes in the market exposure of investors: flows into and out of risky securities. Using data on all trades by individual Finnish investors over more than 14 years, we show that active investors who successfully time the market in the first half of the sample are more likely to successfully time in the second half. We further show that investors who time the market during the run-up and crash around 2000 are more likely to time the run-up and crash around 2007. Our evidence suggests that it is possible to use the trading patterns of these skilled investors to anticipate market movements, lending some credibility to the view that market returns are predictable and market bubbles are identifiable in real time.

Keywords: Market timing, bubbles, market crashes

JEL Classification: G10, G11, G12, G14, G15

Suggested Citation

Keppo, Jussi and Shumway, Tyler and Weagley, Daniel, Are Market Returns Predictable? (January 31, 2019). Georgia Tech Scheller College of Business Research Paper No. 2015-12. Available at SSRN: https://ssrn.com/abstract=2463884 or http://dx.doi.org/10.2139/ssrn.2463884

Jussi Keppo

National University of Singapore - NUS Business School ( email )

1 Business Link
Singapore, 117592
Singapore

Tyler Shumway

University of Michigan at Ann Arbor, The Stephen M. Ross School of Business ( email )

701 Tappan Street
Ann Arbor, MI MI 48109
United States
734-763-4129 (Phone)
734-936-0274 (Fax)

HOME PAGE: http://www.umich.edu/~shumway

Daniel Weagley (Contact Author)

Georgia Institute of Technology - Scheller College of Business ( email )

800 West Peachtree St.
Atlanta, GA 30308
United States
(404) 385-3015 (Phone)

HOME PAGE: http://www.danielweagley.com

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