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Market Timing and Cap Rotation

 

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Market Timing and Cap Rotation

Dimitrios D. Thomakos, Tao Wang & Jingtao Wu

Mathematical and Computer Modelling
Volume 46, Issues 1-2, July 2007, Pages 278-291


Abstract. We examine the predictability of stock index returns (S&P500, S&P400 and Russell 2000) using the short-term interest rate as a predictor variable. Contrary to recent advances in the literature, we do find that the short-term interest rate has predictive power but over the relative performance of stock index returns (that is, when one accounts for cross-index differences), especially during the period when one of the index returns is negative. Trading strategies based on the finding prove to be profitable.

Keywords. Market timing, Short-term interest rate, Trading strategy

DOI. 10.1016/j.mcm.2006.12.036


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