Can Long-Term Historical Data Help Investors Time the Market?

Downe, Edward A.; O'Connor, Matthew; Shapiro, Steven; Reid, Sean
June 2004
American Business Review;Jun2004, Vol. 22 Issue 2, p108
Academic Journal
The paradigm of stock market efficiency (EMH) reached its dominance in academic circles in the 1970's. A breach occurred in the 1990's and came mainly from three sources. The first was reports of anomalies that did not square with the EMH, and further studies suggesting that stock prices were too volatile to accord with a simple present value of dividends model. Second, was the finding that the excess volatility was related to the observed predictability of multi-period returns. Lastly, was the emergence of behavioral finance with its discovery of systematic biases in human judgment. In this paper, the authors attempt to use long-term data to construct market timing models for investors. In the first section, the authors introduce the models and their performance between April 1953 and 2003 using both data available to investors and out-of-sample data. The second section gives a more detailed explanation of the model's construction.


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