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Timing versus Buy and Hold: A Model for Determining Predictive Accuracy Required for Superior Performance
Author(s) -
Hilliard Jimmy E.,
Hilliard Jitka
Publication year - 2011
Publication title -
financial review
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.621
H-Index - 47
eISSN - 1540-6288
pISSN - 0732-8516
DOI - 10.1111/j.1540-6288.2011.00313.x
Subject(s) - sharpe ratio , portfolio , volatility (finance) , econometrics , stock (firearms) , measure (data warehouse) , economics , computer science , financial economics , data mining , mechanical engineering , engineering
In this application, we develop a model to simulate the decisions of a trader whose subjective distribution of returns may be correlated with realized stock returns. Using empirically estimated parameters from stocks in the CRSP database, we obtain performance data on a number of measures, including mean returns, volatility, the Sharpe measure, and the probability of a correct trading decision. The model suggests that daily trading of a portfolio of 20 volatile stocks gives a Sharpe measure better than that of buying and holding the S&P 500 when timing accuracy is 53% or better.