Measuring Market Timing: An International
Examination of Market Timing Conditions

Abstract

The objective of this article is to introduce an expost measure of market timing independent of luck or skill in order to identify when market conditions are more favorable to successful market timing and to evaluate the conclusions of several previous academic studies. We propose that basic market conditions rotate from favoring buy-and-hold investing to favoring market timing strategies, and that these conditions can be measured in any equity market by tracking the results of a constant skilled market timer. We seek to identify what market return conditions are more conducive to successful timing for this constant-skilled investor and when these conditions have been present over our sample period.

The MTBH metric was calculated for 44 countries for 14 years and compares findings of eight previous studies of the timing ability in mutual fund managers, stock traders, option traders, and individual investors across several U.S. and international indexes. The MTBH metric is particularly accurate in explaining the positive timing results for options traders and hedge fund managers, but not as accurate in explaining mutual fund timing. The MTBH metric provides an alternative explanation for non-persistent market-timing results outside of the investors’ behavior or skill and can be applied to any foreign or domestic market to evaluate managers’ timing results.

TOPICS: Security analysis and valuation, quantitative methods