Timing the stock market with a joint examination of the presidential election cycle and the yield curve
Purpose - The purpose of this study is to examine the pertinence of combining the positioning along the US presidential election cycle and the inversions of the yield curve as a guide for a market timing strategy on the S&P 500. These variables provide warning signals for either an abnormally high probability of tighter future economic conditions or an abnormally high probability of more accommodative future economic conditions, not both. As such, they represent natural complement. Design/methodology/approach - The combination of the two variables leads to four scenarios: inverted yield curve or not and first half or second half of the presidential cycle. Two timing strategies are proposed to act on these scenarios: the “type T” strategy for Traditional investors not allowed to sell short and focusing on active risk focus and the “type H” strategy for Hedge Fund-like investors focusing on absolute risk. Findings - Compared to a buy-and-hold investment in the S&P 500, the “type H” version increases the return per unit of risk from 0.81 to 1.10 and the “type T” delivers an annualized information ratio of 0.62. Robustness tests show that the strategy adds value under both specifications in the majority of 1-, 3- and 10-year sub-periods. Application of the Henriksson-Merton test confirms that the two strategies have a genuine market timing ability. Originality/value - While the predictive variables have been investigated on a standalone basis, the idea of combining these two predictors is new. The idea of examining market timing from the perspective of both traditional investor and hedge fund like investor is also original.
If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
Volume (Year): 25 (2008)
Issue (Month): 3 (October)
|Contact details of provider:|| Web page: http://www.emeraldinsight.com|
|Order Information:|| Postal: Emerald Group Publishing, Howard House, Wagon Lane, Bingley, BD16 1WA, UK|
Web: http://emeraldgrouppublishing.com/products/journals/journals.htm?id=sef Email:
When requesting a correction, please mention this item's handle: RePEc:eme:sefpps:v:25:y:2008:i:3:p:152-164. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Virginia Chapman)
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.