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Please use this identifier to cite or link to this item:
http://hdl.handle.net/2451/29951
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| Title: | Time-Varying Sharpe Ratios and Market Timing |
| Authors: | Whitelaw, Robert F.
Tang, Yi |
| Issue Date: | 7-Sep-2011 |
| Series/Report no.: | FIN-11-005 |
| Abstract: | This paper documents predictable time-variation in stock market Sharpe
ratios. Predetermined financial variables are used to estimate both the
conditional mean and volatility of equity returns, and these moments are
combined to estimate the conditional Sharpe ratio, or the Sharpe ratio
is estimated directly as a linear function of these same variables. In
sample, estimated conditional Sharpe ratios show substantial
time-variation that coincides with the phases of the business cycle.
Generally, Sharpe ratios are low at the peak of the cycle and high at
the trough. In an out-of-sample analysis, using 10-year rolling
regressions, relatively naive market-timing strategies that exploit this
predictability can identify periods with Sharpe ratios more than 45%
larger than the full sample value. In spite of the well-known
predictability of volatility and the more controversial forecastability
of returns, it is the latter factor that accounts primarily for both the
in-sample and out-of-sample results. |
| URI: | http://hdl.handle.net/2451/29951 |
| Appears in Collections: | Finance Working Papers
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