Time-Varying Sharpe Ratios and Market Timing

Yi Tang and Robert F. Whitelaw ()
Additional contact information
Yi Tang: School of Business, Fordham University, Bronx, NY 10458, United States
Robert F. Whitelaw: Stern School of Business, NYU, 44 W. 4th St., Suite 9-190, New York, NY 10012, USA;

Quarterly Journal of Finance (QJF), 2011, vol. 01, issue 03, 465-493

Abstract: This paper documents predictable time-variation in stock market Sharpe ratios. Predetermined financial variables are used to estimate both the conditional mean and volatility of equity returns, and these moments are combined to estimate the conditional Sharpe ratio, or the Sharpe ratio is estimated directly as a linear function of these same variables. In sample, estimated conditional Sharpe ratios show substantial time-variation that coincides with the phases of the business cycle. Generally, Sharpe ratios are low at the peak of the cycle and high at the trough. In an out-of-sample analysis, using 10-year rolling regressions, relatively naive market-timing strategies that exploit this predictability can identify periods with Sharpe ratios more than 45% larger than the full sample value. In spite of the well-known predictability of volatility and the more controversial forecastability of returns, it is the latter factor that accounts primarily for both the in-sample and out-of-sample results.

Keywords: Sharpe ratio; predictability; stock market (search for similar items in EconPapers)
Date: 2011
References: View complete reference list from CitEc
Citations: View citations in EconPapers (12)

Downloads: (external link)
http://www.worldscientific.com/doi/abs/10.1142/S2010139211000122
Access to full text is restricted to subscribers

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:wsi:qjfxxx:v:01:y:2011:i:03:n:s2010139211000122

Ordering information: This journal article can be ordered from

DOI: 10.1142/S2010139211000122

Access Statistics for this article

Quarterly Journal of Finance (QJF) is currently edited by Fernando Zapatero

More articles in Quarterly Journal of Finance (QJF) from World Scientific Publishing Co. Pte. Ltd.
Bibliographic data for series maintained by Tai Tone Lim ().