Equity-style timing: A multi-style rotation model for the Russell large-cap and small-cap growth and value style indexes

Researchers and practitioners have devoted considerable attention to devising market-timing strategies as potential value-enhancement tools. The success of such active or tactical asset allocation strategies is dependent on their ability to capture either inefficiencies, to the extent that they exist, or disequilibria associated with changes in the investor opportunity set. Much of the equity-style timing literature focuses on the shifting between pairs of risky assets or between one risky and one riskless asset class, using a binomial approach. This paper develops a multinomial timing model based on macroeconomic and fundamental public information using Frank Russell large-cap and small-cap style indexes. We model four different market segments simultaneously. Out-of-sample tests demonstrate that active multi-style rotation strategies can be devised that outperform the best performing buy-and-hold portfolio. The profitability of such strategies is robust to reasonable levels of transaction costs.