Are Market Returns Predictable?
54 Pages Posted: 11 Jul 2014 Last revised: 22 Apr 2019
Date Written: January 31, 2019
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: Suggested Citation