Market Timing with Aggregate and Idiosyncratic Stock Volatilities

FRB St. Louis Working Paper No. 2005-073A

22 Pages Posted: 14 Dec 2005

See all articles by Hui Guo

Hui Guo

University of Cincinnati - Department of Finance - Real Estate

Jason Higbee

Federal Reserve Bank of St. Louis - Research Division

Date Written: February 2006

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 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

Guo, Hui and Higbee, Jason, Market Timing with Aggregate and Idiosyncratic Stock Volatilities (February 2006). FRB St. Louis Working Paper No. 2005-073A, Available at SSRN: https://ssrn.com/abstract=869447 or http://dx.doi.org/10.2139/ssrn.869447

Hui Guo (Contact Author)

University of Cincinnati - Department of Finance - Real Estate ( email )

College of Business
418 Carl H. Lindner Hall
Cincinnati, OH 45221
United States
513.556.7077 (Phone)
513.556.0979 (Fax)

HOME PAGE: http://homepages.uc.edu/~guohu/

Jason Higbee

Federal Reserve Bank of St. Louis - Research Division ( email )

411 Locust St
Saint Louis, MO 63011
United States

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