The Odds of Profitable Market Timing

Luigi Buzzacchi and Luca Ghezzi
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Luigi Buzzacchi: Interuniversity Department of Regional and Urban Studies and Planning & FULL, Politecnico di Torino, Viale Mattioli 39, 10125 Torino, Italy
Luca Ghezzi: Department of Integrated Business Management, Università Carlo Cattaneo, Corso Matteotti 22, 21053 Castellanza, VA, Italy

JRFM, 2021, vol. 14, issue 6, 1-14

Abstract: This statistical study refines and updates Sharpe’s empirical paper (1975, Financial Analysts Journal) on switching between US common stocks and cash equivalents. According to the original conclusion, profitable market timing relies on a representative portfolio manager who can correctly forecast the next year at least 7 times out of 10. Four changes are made to the original setting. The new data set begins and ends with similar price-earnings ratios; a more accurate approximation of commissions is given; the rationality of assumptions is examined; a prospective and basic Monte Carlo analysis is carried out so as to consider the heterogeneous performance of a number of portfolio managers with the same forecasting accuracy. Although the first three changes improve retrospectively the odds of profitable market timing, the original conclusion is corroborated once more.

Keywords: market timing; commission; forecasting accuracy; Monte Carlo analysis (search for similar items in EconPapers)
JEL-codes: C E F2 F3 G (search for similar items in EconPapers)
Date: 2021
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