Documentation for the market timing model of the open source hedge fund

Market Timing Models For A Momentum Strategy.

By Sandra Makumbirofa

Everyone has an opinion about what the state of the market will be in the short term or long term, never mind that stock prices follow a random walk or the possible clash between that comes between the invisible hand of the market and the regulatory rules made by policy makers.

Returns in the market are limited based on the performance among the wide range of asset classes over a period of time. In the face of such limitations, not every investor in the market can make a high return and in most cases the average investor will manage to earn an average return before the transaction costs are factored in. An efficient market timing model is thus believed to be an means to an end of this hurdle for the investor.

In this article I will make a suggestion of a suitable quantitative model of market timing that will enable us to determine the level of market exposure our momentum strategy should have. Section 2 gives evidence of the some of the market timing models that have worked empirically over the years. Section 3 is an introduction to regime based market timing models that have been chosen for our hedge fund. Section 3.1 introduces and briefly discusses the Hidden Markov Models and Section 4 will give a conclusion to the article. Read more

Introduction to Market timing models

By Sandra Makumbirofa

The study of stock market trading is synonymous for its random walk properties, yet there is still a strong controversial school of thought that supports the idea of ‘market timing’. Detemple and Rindisbacher (2013:2492) describe market timing as the ability to extract information about future market returns of an investment. These market timing models aim to provide a lower-risk strategy for growing portfolios by shifting assets during periods of high risk and low risk.

Since trading on the stock market involves constant buying and selling of stock to increase one’s profitability, traders have long been looking for the key to effectively anticipate the market ahead of other traders. The disadvantage of discovering this key is that a truly successful market timing method is not sustainable in the long-run because as more and more traders discover it, it ceases to be effective (Dickson & Knudsen, 2012:1). Read more