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Market timing strategies that worked

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  • Pu Shen

Abstract

In this paper, we present a few simple market-timing strategies that appear to outperform the \"buy-and-hold\" strategy, with real-time data from 1970 to 2000. Our focus is on spreads between the E/P ratio of the S&P 500 index and interest rates. Extremely low spreads, as compared to their historical ranges, appear to predict higher frequencies of subsequent market downturns in monthly data. We construct \"horse races\" between switching strategies based on extremely low spreads and the market index. Switching strategies call for investing in the stock market index unless spreads are lower than predefined thresholds. We find that switching strategies outperformed the market index in the sense that they provide higher mean returns and lower variances. In particular, the strategy based on the spread between the E/P ratio and a short-term interest rate comfortably and robustly beat the market index even when transaction costs are incorporated.

Suggested Citation

  • Pu Shen, 2002. "Market timing strategies that worked," Research Working Paper RWP 02-01, Federal Reserve Bank of Kansas City.
    • Handle: RePEc:fip:fedkrw:rwp02-01
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    File URL: https://www.kansascityfed.org/documents/5406/pdf-RWP02-01.pdf
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    References listed on IDEAS

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    Cited by:

    1. Thillaikkoothan Palanichamy & Parthajit Kayal, 2022. "Multiple Dimensions of Cyclicality in Investing," Working Papers 2022-216, Madras School of Economics,Chennai,India.
    2. XingYu Fu & JinHong Du & YiFeng Guo & MingWen Liu & Tao Dong & XiuWen Duan, 2018. "A Machine Learning Framework for Stock Selection," Papers 1806.01743, arXiv.org, revised Aug 2018.

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