Market Timing Ability and Volatility Implied in Investment Newsletters' Asset Allocation Recommendations

47 Pages Posted: 3 Sep 1999  

John R. Graham

Duke University; National Bureau of Economic Research (NBER)

Campbell R. Harvey

Duke University - Fuqua School of Business; National Bureau of Economic Research (NBER); Duke Innovation & Entrepreneurship Initiative

Date Written: February 1995

Abstract

We analyze the advice contained in a sample of 237 investment strategies over the 1980-1992 period. Each newsletter strategy recommends a mix of equity and cash. We construct portfolios based on these recommendations and find that only a small number of the newsletters appear to have higher average returns than passive portfolios constructed to have the same returns variance. We test the timing abilities of newsletters by examining how often newsletters correctly change their equity weights. Our evidnece shows that the newsletters offer unimpressive asset allocation advice. Knowledge of the asset allocation weights also implies knowledge of the exact conditional betas. As a result, we present direct tests of market timing ability that bypass beta estimation problems. Assuming that different letters cater to investors with different risk aversions, we are able to infer each newsletter's forecasted market returns. The standard deviation of newsletters' forecasts provides a natural measure of disagreement in the market. We find that the degree of disagreement contains information about both market volatility and trading activity.

Keywords: Newsletter performance, market timing

JEL Classification: G11

Suggested Citation

Graham, John Robert and Harvey, Campbell R., Market Timing Ability and Volatility Implied in Investment Newsletters' Asset Allocation Recommendations (February 1995). Available at SSRN: https://ssrn.com/abstract=6006 or http://dx.doi.org/10.2139/ssrn.6006

John Robert Graham (Contact Author)

Duke University ( email )

Box 90120
Durham, NC 27708-0120
United States
919-660-7857 (Phone)
919-660-8030 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Campbell R. Harvey

Duke University - Fuqua School of Business ( email )

Box 90120
Durham, NC 27708-0120
United States
919-660-7768 (Phone)
919-660-8030 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Duke Innovation & Entrepreneurship Initiative ( email )

215 Morris St., Suite 300
Durham, NC 27701
United States

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