It Takes Two to Tango: Fundamental Timing in Stock Market

Abstract

In this paper, we propose a fundamental timing strategy in both U.S. and Chinese stock market to trade the fundamental sorted portfolios such as value and profitability portfolios in the time series dimension. We find that fundamental timing strategies based on moving average (MA) timing signals could generate substantial performance improvements relative to corresponding buy-and-hold fundamental strategies. The annualized average return of the 20-day MA fundamental timing strategies reaches about 37% with Sharpe ratio nearly 1.30. These findings are robust to Fama-French factor model adjustment, alternative lag lengths of MA signals, holding days, and transaction costs. Moreover, we find that the fundamental timing premium cannot be explained by market timing ability or business cycle, and fundamental timing is more profitable among firms with high idiosyncratic volatility and high illiquidity measures.