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