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Diversification benefits in trading?

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  • Raphael Markellos

Abstract

This study argues that there may exist benefits in active portfolio management and trading other than the possibility of obtaining excess returns. The objective is not to attack the hypothesis that trading cannot produce (risk-adjusted) returns that are superior to passive investment strategies. What is suggested is that the combination of active and passive strategies can help considerably in diversifying investment positions. An empirical application using large samples of daily data on the Dow Jones Industrial Average (DJIA) and the Financial Times Institute of Actuaries 30 (FT30) indexes shows that simple market timing techniques, such as those used by Brock et al. (Journal of Finance, 47, 1731-64, 1992), Mills (International Journal of Finance and Economics, 2, 319-31, 1997) and Markellos (Applied Economics Letters, 6, 177-79, 1999), can be combined with buy-and-hold strategies to match the market return at a fraction of market risk. In accordance with the studies by Mills and Markellos, it is found that the behaviour of the data appears to have changed in recent years.

Suggested Citation

  • Raphael Markellos, 2004. "Diversification benefits in trading?," Applied Financial Economics, Taylor & Francis Journals, vol. 14(1), pages 13-17.
    • Handle: RePEc:taf:apfiec:v:14:y:2004:i:1:p:13-17
    DOI: 10.1080/0960310042000164185
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    References listed on IDEAS

    as
    1. Raphael Markellos & Terence Mills, 2001. "Unit roots in the CAPM?," Applied Economics Letters, Taylor & Francis Journals, vol. 8(8), pages 499-502.
    2. Raphael Markellos, 1999. "Investment strategy evaluation with cointegration," Applied Economics Letters, Taylor & Francis Journals, vol. 6(3), pages 177-179.
    3. Mills, Terence C, 1997. "Technical Analysis and the London Stock Exchange: Testing Trading Rules Using the FT30," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 2(4), pages 319-331, October.
    4. Brock, William & Lakonishok, Josef & LeBaron, Blake, 1992. "Simple Technical Trading Rules and the Stochastic Properties of Stock Returns," Journal of Finance, American Finance Association, vol. 47(5), pages 1731-1764, December.
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