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Market timing with aggregate and idiosyncratic stock volatilities

Hui Guo () and Jason Higbee

No 2005-073, Working Papers from Federal Reserve Bank of St. Louis

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.

Keywords: Stock; exchanges (search for similar items in EconPapers)
Date: 2006
New Economics Papers: this item is included in nep-bec, nep-fin and nep-fmk
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