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Is Fundamental Indexation able to time the market? Evidence from the Dow Jones Industrial Average and the Russell 1000

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  • Chen, Doris
  • Dempsey, Michael
  • Lajbcygier, Paul

Abstract

Fundamental Indexation weights stock according to a firm's economic size, not stock price or market capitalization. This means that at least in theory, unlike traditional market capitalization weighted indexes, it prevents overinvestment in overpriced stock and vice versa. It should therefore effectively time the market by avoiding incorrect investment in cyclically mispriced stock. We ascertain if Fundamental Indexation outperforms traditional indexing and whether any outperformance can be attributed to market timing. Using almost fifty years of Dow Jones Industrial Average index and Russell 1000 index returns, we find some evidence of limited market timing but no evidence of overall positive abnormal performance.

Suggested Citation

  • Chen, Doris & Dempsey, Michael & Lajbcygier, Paul, 2015. "Is Fundamental Indexation able to time the market? Evidence from the Dow Jones Industrial Average and the Russell 1000," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 37(C), pages 162-177.
    • Handle: RePEc:eee:intfin:v:37:y:2015:i:c:p:162-177
    DOI: 10.1016/j.intfin.2015.02.004
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    References listed on IDEAS

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    1. 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.
    2. Fama, Eugene F & French, Kenneth R, 1996. "Multifactor Explanations of Asset Pricing Anomalies," Journal of Finance, American Finance Association, vol. 51(1), pages 55-84, March.
    3. David Blitz & Laurens Swinkels, 2008. "Fundamental indexation: An active value strategy in disguise," Journal of Asset Management, Palgrave Macmillan, vol. 9(4), pages 264-269, October.
    4. Fama, Eugene F. & French, Kenneth R., 1993. "Common risk factors in the returns on stocks and bonds," Journal of Financial Economics, Elsevier, vol. 33(1), pages 3-56, February.
    5. Julius Hemminki & Vesa Puttonen, 2008. "Fundamental indexation in Europe," Journal of Asset Management, Palgrave Macmillan, vol. 8(6), pages 401-405, February.
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    Cited by:

    1. Rasha Tawfiq Abadi & Florinda Silva, 2022. "Do Islamic fundamental weighted indices outperform their conventional counterparts? An empirical investigation during the crises in the MENA region," Eurasian Economic Review, Springer;Eurasia Business and Economics Society, vol. 12(2), pages 241-266, June.
    2. M. Volkov & М. Волков, 2018. "Анализ фундаментальной индексации как эффективный подход к активному инвестированию // Analysis of Fundamental Indexation as an Efficient Approach to Active Investing," Review of Business and Economics Studies // Review of Business and Economics Studies, Финансовый Университет // Financial University, vol. 6(4), pages 41-51.
    3. Tomasz MIZIOLEK & Adam ZAREMBA, 2017. "Fundamental Indexation in European Emerging Markets," Journal for Economic Forecasting, Institute for Economic Forecasting, vol. 0(1), pages 23-37, March.

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    More about this item

    Keywords

    Indexing; Market capitalized weighted index; Fundamental weighted index; Equal weighted index; Market timing;
    All these keywords.

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

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