Discount Rate Changes and Market Timing: A Multinational Study
AbstractThis study investigates whether discount rate changes serve as an informative signal for investors to enter or exit the stock market. Based on the signal, a market timing strategy is formulated and its performance relative to a passive buy-and-hold strategy is tested with several performance evaluation methods. Empirical evidence derived from data of seven developed countries over more than 29 years is virtually invariant to the performance measures employed and uniformly supports the superiority of the market timing strategy. However, when the full study period is divided into pre-1994 and post-1993 sub-periods, the dominance of the market timing strategy essentially vanished over the latter sub-sample period. Thus, the tactic of basing investment strategy formulation on discount rate changes has turned unproductive in recent years. There is actually weak evidence over the post-1993 time period in favor of the passive buy-and-hold strategy.
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Bibliographic InfoArticle provided by Society for AEF in its journal Annals of Economics and Finance.
Volume (Year): 10 (2009)
Issue (Month): 2 (November)
Discount rate; Stock market; Market timing strategy; Buy-and-Hold strategy;
Find related papers by JEL classification:
- G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
- G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
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