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Timing the stock market: Does it really make no sense?

Author

Listed:
  • Dichtl, Hubert
  • Drobetz, Wolfgang
  • Kryzanowski, Lawrence

Abstract

Many private and institutional investors attempt to time the market and generate abnormal returns by periodically switching their portfolio allocations between the stock market and the cash market based on their return predictions. However, most academic studies emphasize that a successful market timing strategy requires a prediction accuracy that is usually not observable in reality. While prior studies evaluate the outcomes based on traditional return and risk measures, we adopt both expected and non-expected utility models to compare market timing with common benchmarks. Our analyses are based on a “simulated market timer” that does not require a specific forecast model. Bootstrap-based simulations show that even with low hit ratios, investors with non-expected utility preferences can consider market timing as highly desirable. The attractiveness of market timing is also partly attributable to short-termism in performance evaluation.

Suggested Citation

  • Dichtl, Hubert & Drobetz, Wolfgang & Kryzanowski, Lawrence, 2016. "Timing the stock market: Does it really make no sense?," Journal of Behavioral and Experimental Finance, Elsevier, vol. 10(C), pages 88-104.
    • Handle: RePEc:eee:beexfi:v:10:y:2016:i:c:p:88-104
    DOI: 10.1016/j.jbef.2016.03.005
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    Citations

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    Cited by:

    1. Kuntz, Laura-Chloé, 2020. "Beta dispersion and market timing," Journal of Empirical Finance, Elsevier, vol. 59(C), pages 235-256.
    2. Chendi Ni & Yuying Li & Peter A. Forsyth, 2023. "Neural Network Approach to Portfolio Optimization with Leverage Constraints:a Case Study on High Inflation Investment," Papers 2304.05297, arXiv.org, revised May 2023.
    3. Kumar, Satish & Rao, Sandeep & Goyal, Kirti & Goyal, Nisha, 2022. "Journal of Behavioral and Experimental Finance: A bibliometric overview," Journal of Behavioral and Experimental Finance, Elsevier, vol. 34(C).
    4. Prince T. Medina, 2018. "Equity Analysis in Buying Company Shares on the Philippine Stock Exchange," GATR Journals jfbr148, Global Academy of Training and Research (GATR) Enterprise.
    5. Kuntz, Laura-Chloé, 2020. "Beta dispersion and market timing," Discussion Papers 46/2020, Deutsche Bundesbank.
    6. Dichtl, Hubert & Drobetz, Wolfgang & Otto, Tizian, 2023. "Forecasting Stock Market Crashes via Machine Learning," Journal of Financial Stability, Elsevier, vol. 65(C).

    More about this item

    Keywords

    Market timing; Expected utility theory; Regret theory; Anticipated utility theory; Cumulative prospect theory; Bootstrap simulation;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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