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Return Predictability and Market-Timing: A One-Month Model

30 Pages Posted: 10 Oct 2017  

Blair Hull

Hull Investments LLC

Xiao Qiao

SummerHaven Investment Management

Petra Bakosova

Hull Tactical

Date Written: October 9, 2017

Abstract

We propose a one-month market-timing model constructed from 15 diverse variables. We use weighted least squares with stepwise variable selection to build a predictive model for the one-month-ahead market excess returns. From our statistical model, we transform our forecasts into investable positions to build a market-timing strategy. From 2003 to 2017, our strategy results in 16.6% annual returns with a 0.92 Sharpe ratio and a 20.3% maximum drawdown, whereas the S&P 500 has annual returns of 10%, a 0.46 Sharpe ratio, and a maximum drawdown of 55.2%. When our one-month model is used in conjunction with Hull and Qiao’s (2017) six-month model, the Sharpe ratio of the combined strategy exceeds the individual model Sharpe ratios. The combined model has 15% annual returns, a Sharpe ratio of 1.12, and a maximum drawdown of 14%. We publish forecasts from our one-month model in our Daily Report.

Keywords: equity premium, forecasting, predictability, market timing, asset returns, tactical asset allocation

Suggested Citation

Hull, Blair and Qiao, Xiao and Bakosova, Petra, Return Predictability and Market-Timing: A One-Month Model (October 9, 2017). Available at SSRN: https://ssrn.com/abstract=3050254

Blair Hull

Hull Investments LLC ( email )

141 W. Jackson Street #1650
Chicago, IL 60604
United States

Xiao Qiao (Contact Author)

SummerHaven Investment Management ( email )

Soundview Plaza,
1266 East Main Street
Stamford, CT 06902
United States

HOME PAGE: http://sites.google.com/site/xiaoqiao10/

Petra Bakosova

Hull Tactical ( email )

141 W. Jackson Street #1650
Chicago, IL 60604
United States
3123563139 (Phone)

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

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