It takes two to tango: Fundamental timing in stock market

Abstract

AbstractIn this paper, we propose a fundamental timing strategy in both U.S. and Chinese stock markets to timing the fundamentals 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 gains relative to buy‐and‐hold strategies. The annualized average return of 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, the fundamental timing premium cannot be explained away by market timing or business cycle, and fundamental timing is more profitable among firms with high idiosyncratic volatility and high illiquidity.