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Investing in the S&P 500 index: Can anything beat the buy‐and‐hold strategy?
Author(s) -
Dichtl Hubert
Publication year - 2020
Publication title -
review of financial economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.347
H-Index - 41
eISSN - 1873-5924
pISSN - 1058-3300
DOI - 10.1002/rfe.1078
Subject(s) - exploit , economics , investment strategy , index (typography) , stock (firearms) , investment (military) , financial economics , investment decisions , asset allocation , efficient market hypothesis , econometrics , relevance (law) , behavioral economics , stock market , monetary economics , microeconomics , computer science , portfolio , computer security , law , horse , world wide web , engineering , biology , paleontology , political science , mechanical engineering , politics , market liquidity
Abstract Determining whether investment strategies exist that provide higher (risk‐adjusted) returns than buying and holding the S&P 500 stock market index is not only highly relevant for finance theory, but also for the asset management industry. This study conducts a comprehensive test using realistic investment strategies based on monthly seasonalities, technical indicators, and fundamental factors (over 4,100 strategies in total). To assess statistical significance, we use Hansen's data‐snooping‐resistant SPA test. The results show that only investment strategies trying to exploit underreaction and overreaction effects with technical indicators dominate the buy‐and‐hold strategy in some simulation setups. These investment strategies are clearly superior to the strategies based on seasonalities and fundamental factors. Given that underreaction and overreaction effects are mainly justified with cognitive biases, our results support the economic relevance of behavioral finance insights.