Market timing over the business cycle
Journal of Empirical Finance, 2018, vol. 46, issue C, 130-145
This paper analyzes the economic value of linking return predictability to the business cycle. Recent studies show that stock returns are predictable in recessions while bond returns are predictable in expansions. I examine whether these findings can be exploited in real-time trading by letting the coefficients of popular return regressions switch across states of the economy. The switching models I propose are easy to implement and provide meaningful economic gains relative to their constant coefficient versions. However, choosing a good recession signal is important as inaccurate business cycle turning points corrupt the switching extensions.
Keywords: Portfolio choice; Business cycles; Return predictability (search for similar items in EconPapers)
JEL-codes: C53 E44 G11 (search for similar items in EconPapers)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:empfin:v:46:y:2018:i:c:p:130-145
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Journal of Empirical Finance is currently edited by R. T. Baillie, F. C. Palm, Th. J. Vermaelen and C. C. P. Wolff
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