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Pitfalls in market timing test

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  • Chu, Chia-Shang
  • Lu, Liping
  • Shi, Zhentao
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    Abstract

    Henriksson and Merton's market timing test suffers nontrivial size distortion when the observations are serially dependent sequences. Potential danger of finding spurious timing ability can be avoided by implementing a Markov regression that includes the lagged dependent variables as additional explanatory variables.

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    Bibliographic Info

    Article provided by Elsevier in its journal Economics Letters.

    Volume (Year): 103 (2009)
    Issue (Month): 3 (June)
    Pages: 123-126

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    Handle: RePEc:eee:ecolet:v:103:y:2009:i:3:p:123-126

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    Web page: http://www.elsevier.com/locate/ecolet

    Related research

    Keywords: Market timing test Markov regression Spurious regression;

    References

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    1. Marquering, Wessel & Verbeek, Marno, 2004. "A multivariate nonparametric test for return and volatility timing," Finance Research Letters, Elsevier, Elsevier, vol. 1(4), pages 250-260, December.
    2. West, Kenneth D, 1996. "Asymptotic Inference about Predictive Ability," Econometrica, Econometric Society, Econometric Society, vol. 64(5), pages 1067-84, September.
    3. Pesaran, M.H. & Timmermann, A., 1990. "A Simple, Non-Parametric Test Of Predictive Performance," Cambridge Working Papers in Economics 9021, Faculty of Economics, University of Cambridge.
    4. Greer, Mark, 2003. "Directional accuracy tests of long-term interest rate forecasts," International Journal of Forecasting, Elsevier, Elsevier, vol. 19(2), pages 291-298.
    5. Romacho, Joao Carlos & Cortez, Maria Ceu, 2006. "Timing and selectivity in Portuguese mutual fund performance," Research in International Business and Finance, Elsevier, Elsevier, vol. 20(3), pages 348-368, September.
    6. Gencay, Ramazan, 1998. "Optimization of technical trading strategies and the profitability in security markets," Economics Letters, Elsevier, Elsevier, vol. 59(2), pages 249-254, May.
    7. Henriksson, Roy D & Merton, Robert C, 1981. "On Market Timing and Investment Performance. II. Statistical Procedures for Evaluating Forecasting Skills," The Journal of Business, University of Chicago Press, vol. 54(4), pages 513-33, October.
    8. J.S. Cramer, 1998. "Predictive Performance of the Binary Logit Model in Unbalanced Samples," Tinbergen Institute Discussion Papers 98-085/4, Tinbergen Institute.
    9. Cumby, Robert E. & Modest, David M., 1987. "Testing for market timing ability : A framework for forecast evaluation," Journal of Financial Economics, Elsevier, Elsevier, vol. 19(1), pages 169-189, September.
    10. Buchanan, W. K. & Hodges, P. & Theis, J., 2001. "Which way the natural gas price: an attempt to predict the direction of natural gas spot price movements using trader positions," Energy Economics, Elsevier, Elsevier, vol. 23(3), pages 279-293, May.
    11. Henriksson, Roy D, 1984. "Market Timing and Mutual Fund Performance: An Empirical Investigation," The Journal of Business, University of Chicago Press, vol. 57(1), pages 73-96, January.
    12. Diebold, Francis X & Mariano, Roberto S, 2002. "Comparing Predictive Accuracy," Journal of Business & Economic Statistics, American Statistical Association, American Statistical Association, vol. 20(1), pages 134-44, January.
    13. Chen, Xiaohong & Fan, Yanqin, 2006. "Estimation of copula-based semiparametric time series models," Journal of Econometrics, Elsevier, Elsevier, vol. 130(2), pages 307-335, February.
    14. Jiang, Wei, 2003. "A nonparametric test of market timing," Journal of Empirical Finance, Elsevier, Elsevier, vol. 10(4), pages 399-425, September.
    15. Granger, C. W. J. & Newbold, P., 1974. "Spurious regressions in econometrics," Journal of Econometrics, Elsevier, Elsevier, vol. 2(2), pages 111-120, July.
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    Cited by:
    1. Blaskowitz, Oliver & Herwartz, Helmut, 2014. "Testing the value of directional forecasts in the presence of serial correlation," International Journal of Forecasting, Elsevier, Elsevier, vol. 30(1), pages 30-42.
    2. Tsuchiya, Yoichi, 2013. "Are government and IMF forecasts useful? An application of a new market-timing test," Economics Letters, Elsevier, Elsevier, vol. 118(1), pages 118-120.
    3. Chou, Cheng & Chu, Chia-Shang J., 2011. "Market timing: Recent development and a new test," Economics Letters, Elsevier, Elsevier, vol. 111(2), pages 105-109, May.
    4. Tsuchiya, Yoichi, 2014. "Purchasing and supply managers provide early clues on the direction of the US economy: An application of a new market-timing test," International Review of Economics & Finance, Elsevier, Elsevier, vol. 29(C), pages 599-618.

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