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PORTFOLIO MANAGEMENT: THE ROLE OF CALIBRATION, SHARPNESS, AND UNCERTAINTY
Author(s) -
Wan Shui Ki
Publication year - 2019
Publication title -
journal of financial research
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.319
H-Index - 49
eISSN - 1475-6803
pISSN - 0270-2592
DOI - 10.1111/jfir.12189
Subject(s) - predictability , portfolio , sharpe ratio , econometrics , calibration , economics , project portfolio management , sample (material) , index (typography) , financial economics , quadratic equation , computer science , mathematics , statistics , chemistry , geometry , management , chromatography , project management , world wide web
I evaluate the out‐of‐sample predictability of several major indicators for bull and bear markets in monthly S&P 500 series with three quadratic probability score components: calibration, sharpness, and uncertainty. I find that uncertainty limits the trend characterization and thus provides a new perspective from which to identify bull and bear markets. I also find that sharpness plays a key role in determining portfolio returns. Trading strategies that capitalize on sharpness generate higher Sharpe ratios and portfolio returns. The Aruoba–Diebold–Scotti business conditions index is the most profitable indicator for both medium‐ and long‐term trends.