Another Look at Timing the Equity Premiums

18 Pages Posted: 2 Nov 2023

See all articles by Wei Dai

Wei Dai

Dimensional Fund Advisors

Audrey Dong

Dimensional Fund Advisors

Date Written: October 11, 2023

Abstract

We examine strategies that time the market, size, value, and profitability premiums in the US, developed ex US, and emerging markets based on three common timing approaches: valuation ratio, mean reversion, and momentum. Out of the 720 timing strategies we simulated, the vast majority underperformed relative to staying invested in the long side of the premiums. While 30 strategies delivered promising outperformance at first glance, further analysis shows that their outperformance is very sensitive to specific time periods and parameters for strategy construction. Our results highlight the opportunity cost of mistiming the premiums and the importance of discipline for capturing the premiums.

Keywords: Factor timing, factor investing, valuation spread, mean reversion, momentum, asset allocation

JEL Classification: G11, G12, G14

Suggested Citation

Dai, Wei and Dong, Audrey, Another Look at Timing the Equity Premiums (October 11, 2023). Available at SSRN: https://ssrn.com/abstract=4586684 or http://dx.doi.org/10.2139/ssrn.4586684

Wei Dai (Contact Author)

Dimensional Fund Advisors ( email )

6300 Bee Cave Road, Building One
Austin, TX 78746
United States

Audrey Dong

Dimensional Fund Advisors

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