Equity style - timing with technical trading rules

Abstract

In recent years, there has been a growing concern among researchers and practitioners on the profitability of market-timing strategies. This paper addresses the issue whether short-term variations in the spreads of the U.S. value/growth Russell style indices could have been historically exploited utilizing popular technical trading strategies. In the literature this return spread is often called the “value premium”. Much of the equity-style timing literature focuses on the development of either binomial or multinomial timing models based on macroeconomic and fundamental public information. Instead, in our modeling process we use daily time-series data to develop tactical market timing models based on simple and widely used technical rules. Applying different out-of-sample long-short strategies, we conjecture that the value/growth rotation is profitable at feasible levels of transaction costs. Our results demonstrate that active multi-style rotation strategies can be devised to outperform both buy and hold strategies and market as a whole. These strategies can be implemented using futures on Russell style indices.