On the Realized Performance of Market Timing Strategies

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The Information Ratio IR is the conventional metric to gauge the ex post risk-adjusted performance of a market timing strategy. A deficiency of this metric is that it does not account for an average “long bias”, which can confound the timing ability of the evaluated strategy. In this paper, we evaluate two alternative metrics, the Appraisal Ratio and the “Timing IR”, which intent to purge the IR from a non-zero average or systematic exposure to the underlying market. We compare both alternative metrics to the IR, both analytically and in an empirical setting where we evaluate a short-term reversal strategy on the US equity market over the period 1998-2018. We conclude that the Appraisal Ratio is the preferred metric.