Market Timing with Aggregate and Idiosyncratic Stock Volatilities
FRB St. Louis Working Paper No. 2005-073A
22 Pages Posted: 14 Dec 2005
Date Written: February 2006
Guo and Savickas  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 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 return predictability, Market timing, Stock market volatility, Idiosyncratic volatility
JEL Classification: G10, G12
Suggested Citation: Suggested Citation