Is Fundamental Indexation able to time the market? Evidence from the Dow Jones Industrial Average and the Russell 1000

•In theory, Fundamental Indexation should possess market timing ability.•We examine Fundamental Indexation market timing over 50 years.•Limited evidence of market timing exists. Fundamental Indexation weights stock according to a firm's economic size, not stock price or market capitalization. T...

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Bibliographic Details
Published in:Journal of international financial markets, institutions & money institutions & money, 2015-07, Vol.37, p.162-177
Main Authors: Chen, Doris, Dempsey, Michael, Lajbcygier, Paul
Format: Article
Language:English
Subjects:
Dow Jones averages
Economic size
Equal weighted index
Financial performance
Fundamental weighted index
Indexation
Indexes
Indexing
Investment
Market capitalized weighted index
Market timing
Rates of return
Securities markets
Stock prices
Stocks
Studies
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Summary:•In theory, Fundamental Indexation should possess market timing ability.•We examine Fundamental Indexation market timing over 50 years.•Limited evidence of market timing exists. Fundamental Indexation weights stock according to a firm's economic size, not stock price or market capitalization. This means that at least in theory, unlike traditional market capitalization weighted indexes, it prevents overinvestment in overpriced stock and vice versa. It should therefore effectively time the market by avoiding incorrect investment in cyclically mispriced stock. We ascertain if Fundamental Indexation outperforms traditional indexing and whether any outperformance can be attributed to market timing. Using almost fifty years of Dow Jones Industrial Average index and Russell 1000 index returns, we find some evidence of limited market timing but no evidence of overall positive abnormal performance.
ISSN:1042-4431
1873-0612
DOI:10.1016/j.intfin.2015.02.004