Return enhancement trading strategies for size based portfolios

Recent theoretical work suggests that definitions of market efficiency that allow for the possibility of time-varying risk-premia will generally lead to return sign predictability. Consistent with this theory, we show that a logit model based on the lagged value of the market risk premium is useful...

Full description

Saved in:
Bibliographic Details
Published in:Financial markets and portfolio management 2008-03, Vol.22 (1), p.21
Main Authors: Larsen, Glen A, Resnick, Bruce G
Format: Article
Language:English
Subjects:
Business cycles
Economic activity
Economic conditions
Forecasting
Growth rate
Market timing
Portfolio performance
Present value
Rates of return
Recessions
Risk premiums
Securities markets
Stock exchanges
Stocks
Treasury bills
Treasury bonds
Variables
Volatility
Citations: Items that cite this one
Online Access:Get full text
Tags: Add Tag
No Tags, Be the first to tag this record!
Description
Summary:Recent theoretical work suggests that definitions of market efficiency that allow for the possibility of time-varying risk-premia will generally lead to return sign predictability. Consistent with this theory, we show that a logit model based on the lagged value of the market risk premium is useful for successfully predicting the return sign for CRSP small decile portfolio returns, but not large ones. We additionally employ this model in market timing simulations of micro-cap mutual funds in which investment can actually be made. The results indicate that a market-timing strategy based on our return-sign forecasting model outperforms a buy-and-hold strategy for 13 of 14 micro-cap funds studied. On average, the buy-and-hold strategy produces an average compound return of 11.98% per annum versus an average of 16.60% for the market-timing strategy. Nevertheless, trading restrictions make the return-sign forecasting model more practical to employ by the micro-cap fund portfolio manager rather than the individual fund investor. [PUBLICATION ABSTRACT]
ISSN:1934-4554
2373-8529
DOI:10.1007/s11408-007-0069-z