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Market timing with aggregate and idiosyncratic stock volatilities

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  • Hui Guo
  • Jason Higbee

Abstract

Guo and Savickas [2005] show that aggregate stock market volatility and average idiosyncratic stock volatility jointly forecast stock returns. In this paper, we quantify the economic significance of their results from the perspective of a portfolio manager. That is, we evaluate the performance, e.g., the Sharpe ratio and Jensen's alpha, of a mean-variance manager who tries to time the market based on those two variables. We find that, over the period 1968-2004, the associated market-timing strategy outperforms the buy-and-hold strategy, and the difference is statistically and economically significant.

Suggested Citation

  • Hui Guo & Jason Higbee, 2006. "Market timing with aggregate and idiosyncratic stock volatilities," Working Papers 2005-073, Federal Reserve Bank of St. Louis.
    • Handle: RePEc:fip:fedlwp:2005-073
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    References listed on IDEAS

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    Cited by:

    1. Kwang Woo Park & Myeong Hwan Kim, 2009. "The industrial relationships in time-varying beta coefficients between Korea and United States," Applied Economics, Taylor & Francis Journals, vol. 41(15), pages 1929-1938.

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