Empirical Part II – Investment Strategies
Cochrane (1999b) points out the possible application of market timing strategies as a main implication of return predictability. Hence, the rejection of the random walk model might reveal exploitable investment strategies. Moreover, investment strategies can shed light on the economic significance of forecasting power. The findings above support the evidence on return predictability; however, nothing was said about the economic magnitude and its meaning for portfolio management. How a market timing strategy based on the previous analyses might look may be of interest to practitioners. Hence, I identify two reasons for a test of the above-stated hypothesis. First, there is the economic significance which is of interest. The second reason is the possible uncertainty about statistical tests of forecasting models. For instance, Leitch and Tanner (1991) or Gerlow, Irwin and Liu (1993) show a possible economic success of forecasting models even if statistical measures do not support their predictive power.
KeywordsInvestment Strategy Excess Return Sharpe Ratio Investment Period Calibration Window
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