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Market Timing

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Portfolio Construction, Measurement, and Efficiency

Abstract

The work of Treynor and Mazuy (Harvard Business Review 44:131–136, 1966) spawned an extensive literature on returns-based measurement of portfolio performance which distinguishes between a manager’s ability to act on information specific to an individual asset (asset selection) and ability to forecast systematic risk premiums and adjust portfolio exposures accordingly (market, or factor, timing). In a world in which both dynamic trading strategies and derivative securities provide payoffs which are nonlinear in factor returns, obtaining a clear separation between asset selection and market timing is difficult. Additionally, predictability of risk premiums causes a confounding of timing based on public information versus true skill. However, disaggregating the measurement of the components allows us to obtain more accurate measures of the quantity of interest, total portfolio performance.

We thank Wayne Ferson, John Guerard, Winfried Hallerbach, Maja Kos, and Selwyn Yuen for helpful comments.

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Notes

  1. 1.

    The question of how to choose from the vast collection of index funds to construct a portfolio to meet one’s investment objectives has not received much attention in the academic literature and has been left to journals catering to the needs of investment advisers and individual and institutional investors. The exceptions include Elton et al. (2004) and Viceira (2009).

  2. 2.

    For example, see Bodie et al. (2011, Chap. 27.1).

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Authors and Affiliations

  1. Kellogg School of Management, Northwestern University, 2001 Sheridan Road, Evanston, IL, 60208-2001, USA

    Ravi Jagannathan & Robert A. Korajczyk

Authors
  1. Ravi Jagannathan
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  2. Robert A. Korajczyk
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Correspondence to Robert A. Korajczyk .

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  1. McKinley Capital Management, Anchorage, Alaska, USA

    John B. Guerard, Jr.

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Jagannathan, R., Korajczyk, R.A. (2017). Market Timing. In: Guerard, Jr., J. (eds) Portfolio Construction, Measurement, and Efficiency. Springer, Cham. https://doi.org/10.1007/978-3-319-33976-4_3

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