Mean-Variance Market Timing the U.S. Stock Market

Abstract

While recently the after-cost profits of many anomalies are close to zero, investing according to the Mean-Variance (MV) criterion has never been so rewarding. The Global Minimum Variance Portfolio is the simplest option for small investors to profitably gain exposure to the market by timing stock covariances. Minimizing over transaction costs restores credibility in the capability of MV strategies to efficiently target risk premia by timing stock risk premia, additionally lowering downside risk and enhancing scalability. More generally, market timing and estimation error are important drivers behind the MV profitability in the U.S. stock market over the last century.

Keywords: Mean-Variance, Market-timing, Estimation Error, Transaction Costs, Profitability

JEL Classification: C61, D23, G11