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Managing market risk with conditioning information

Author

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  • George Famy

    (College of Business and Economics, Radford University)

Abstract

Excess market return is regressed onto lagged, standardised economic variables. The sign of the forecasted return is used as an input to two market timing models that are run on out-of-sample data during the period 1983–2004. Evidence of market timing ability and superior risk-adjusted performance for the long/short and long-only timing models is demonstrated. Standardised variables appear to have more forecasting power than raw variables. By conditioning on the levels of economic variables with respect to their recent history, market timing leads to better management of market risk and economically significant investment out-performance. Specific applications of Portable Beta are discussed.

Suggested Citation

  • George Famy, 2007. "Managing market risk with conditioning information," Journal of Asset Management, Palgrave Macmillan, vol. 7(6), pages 412-418, March.
    • Handle: RePEc:pal:assmgt:v:7:y:2007:i:6:d:10.1057_palgrave.jam.2250050
    DOI: 10.1057/palgrave.jam.2250050
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    Cited by:

    1. Giulia Dal Pra & Massimo Guidolin & Manuela Pedio & Fabiola Vasile, 2016. "Do Regimes in Excess Stock Return Predictability Create Economic Value? An Out-of-Sample Portfolio Analysis," BAFFI CAREFIN Working Papers 1637, BAFFI CAREFIN, Centre for Applied Research on International Markets Banking Finance and Regulation, Universita' Bocconi, Milano, Italy.

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