قدرت پیش بینی میزان بازده در زمان بندی بازار سهام

This study examines the relationship between yield spread and stock market returns. It also explores a dynamic trading strategy of timing the Indian stock market using the yield spread as an indicator variable. The study concludes with the important result that the yield spread is successful in identifying points of entry and exit for the Indian stock market, thereby delivering superior returns compared to a conventional buy and hold strategy.

Designing an optimal investment strategy is one of the major concerns in financial management. While the conventional wisdom often tends to support a “buy and hold strategy”, where the funds are invested in certain assets for a given time horizon, the dynamic strategy has emerged as a superior alternative in providing better returns. The dynamic strategy would typically involve changing the weight of the optimal portfolio through time. The first argument follows from the view that optimal portfolio choice involves a mean–variance optimization over a set of expected asset returns, where variances and covariances are often captured through a time invariant sample averages based on data. Therefore the strategy only involves a rebalancing of the portfolio in each period to achieve fixed weights. Most important implication of this strategy is that the portfolio choice remains unaffected by economic conditions. In contrast, the alternative, as proposed in Hansen and Richard (1987), would be to add dynamic strategies to the menu of assets, and rebalance the portfolio based on available information in each period. Though the idea of incorporating dynamic strategies into portfolio choice originates in Hansen and Richard (1987), it is further developed by Bansal et al., 1993, Bansal and Campbell, 1996, Ferson and Siegel, 2001, Cochrane, 2001 and Brandt and Santa-Clara, 2004. The basic argument hinges on the possibility that asset returns can be predictable under certain economic conditions which creates an opportunity to construct dynamic trading strategies that might offer superior risk and expected return trade-offs relative to “buy and hold” strategies. The aim of the paper is to evaluate the conventional strategy with that of a dynamic trading strategy based on variables that predict returns and compare the performances of these two competing strategies. More precisely, the paper attempts to develop a dynamic strategy based on yield spread as a determinant of stock returns and contrast the performance with the traditional buy and hold strategy. Considerable research has taken place on examining the relationship between yield spread or the term structure of interest rates and future economic activity1. Stock and Watson (1989) found that yield spreads were important to be included in their newly constructed index of leading economic indicators. Since then various authors have investigated the link between yield spreads and future economic activity, such as, Bernanke, 1990, Friedman and Kuttner, 1993, Estrella and Hardouvelis, 1991 and Estrella and Mishkin, 1997. On the other hand, there is a large body of literature that examines the impact of economic cycles on share prices. According to Campbell (1987), the price of a share is the discounted value of expected cash flows. The strength of the economy determines the magnitude of these cash flows. The price of equity thus reflects expectations of real activity, and changes in the value of equity partially reflect revisions in these expectations. For example, Gerlach (2005) using data from 1988 to 2002, found that the economic volatility, can explain variation in S&P 500-stock index quarterly volatility2. However, the literature to ascertain whether the predictive power of the yield spread can be used to time the stock market is scarce and nascent. In earlier work, Resnick and Shoesmith (2002) developed a probit technique to test whether it was possible to time the stock market using the yield spread. They conducted their analysis for the US markets and found that yield spread can be successfully used to time the US equity markets, resulting in better returns than a simple buy and hold strategy. In a second paper, Liu and Shoesmith (2004) further extended their study to cover other developed countries with similar encouraging results. The objective of this paper is two fold: first, to evaluate the predictive power of the yield spread in timing the Indian stock market. There has been some literature which explores the link between yield spread and economic activity in India. Kanagasabapathy and Goyal (2002) have established that Indian yield spread post 1996 is successful in predicting future economic activity, as reflected in the index of industrial production (IIP). Therefore the paper extends this literature by examining the relationship between yield and stock market returns. Second, the paper explores the possibility of constructing dynamic trading strategies based on the ability of yield spread to predict returns and contrast the expected return trade-offs relative to “buy and hold” strategies. The paper has been structured into following sections: Section 2 describes the data. The methodology used in the paper is described in Section 3. In Section 4, the results of the analysis are discussed, and we conclude in the final section.

Yield spread has emerged as an important predictor of future economic activity. This study shows that the yield spread can also be used to identify points of entry and exit in the stock market to deliver superior returns as compared to a conventional buy and hold strategy. After checking for robustness by using a different filtering technique to identify the stock market cycle, several threshold levels of probabilities for the probit model and testing for market timing the conclusion remains that the dynamic strategy based on yield spread emerges as a successful predictor of cycles in the Indian stock market and provide superior returns than a buy and hold strategy.