Market-timing Test Research Articles

How useful are consumer and real estate brokerage manager forecasts of housing prices in South Korea? A directional analysis

Using a newly developed market timing test, we evaluate the directional accuracy of consumers’ forecasts of housing price inflation based on the Bank of Korea’s South Korean consumer survey and real estate brokerage managers’ forecasts from the Kookmin Bank’s survey data. Our directional analysis results show that Korean real estate brokerage managers’ forecasts and consumers’ forecasts are not useful predictors of housing price inflation during the whole sample period. The results of the directional analysis are the same, even though the sample period was split into subperiods. Our results shed light on the redundancies of consumers’ and real estate brokerage managers’ forecasts in formulating government housing policies for housing price stability. Our findings have policy implications for policymakers. First, although Korean consumers’ and real estate brokerage managers’ forecasts are not useful in making correct predictions about the direction of housing price inflation, those forecasts should be considered as those forecasts can cause consumers’ irrational house buying herding behavior. Next, to stabilize housing price inflation within the policy target range, it may be necessary to control households’ expectations about the future direction of housing prices as it can mitigate their irrational house buying herding behavior. Further, we show the advantage of the new market-timing test and how its test results are robust for serial correlation in time-series forecasts and the corresponding actual outcomes. Relying solely on the market timing tests used in the literature, except for the new test, would lead us to conclude that Korean real-estate brokerage managers’ forecasts are useful.

Robust market timing tests of Canadian hybrid mutual funds

PurposePrior research has documented inconclusive and/or mixed empirical evidence on the timing performance of hybrid funds. Their performance inferences generally do not efficiently control for fixed-income exposure, conditioning information, and cross-correlations in fund returns. This study examines the stock and bond timing performances of hybrid funds while controlling and accounting for these important issues. It also discusses the inferential implications of using alternative bootstrap resampling approaches.Design/methodology/approachWe examine the stock and bond timing performances of hybrid funds using (un)conditional multi-factor benchmark models with robust estimation inferences. We also rely on the block bootstrap method to account for cross-correlations in fund returns and to separate the effects of luck or sampling variation from manager skill.FindingsWe find that the timing performance of portfolios of funds is neutral and sensitive to controlling for fixed-income exposures and choice of the timing measurement model. The block-bootstrap analyses of funds in the tails of the distributions of stock timing performances suggest that sampling variation explains the underperformance of extreme left tail funds and confirms the good and bad luck in the bond timing management of tail funds. We report inference changes based on whether the Kosowski et al. or the Fama and French bootstrap approach is used.Originality/valueThis study provides extensive and robust evidence on the stock and bond timing performances of hybrid funds and their sensitivity based on (un)conditional linear multi-factor benchmark models. It examines the timing performances in the extreme tails funds using the block bootstrap method to efficiently identify (un)skilled fund managers. It also highlights the sensitivity of inferences to the choice of testing methodology.

Directional Accuracy of Urban Consumers’ Inflation Forecasts in China

We evaluate the directional accuracy of inflation forecasts based on the survey data of urban savings account holders in China. By using a new market-timing test, we show that the urban consumers’ expectations of inflation are not a useful predictor of the overall consumer price index (CPI) and the urban household CPI (U-CPI) in China. However, after our in-depth analysis using the inflation rate of each category in the U-CPI basket, we find that the consumers’ forecasts are useful in predicting the movement of the residence component in the U-CPI basket since the third quarter of 2009.

On the directional accuracy of inflation forecasts: evidence from South African survey data

ABSTRACTWe study the information content of South African inflation survey data by determining the directional accuracy of both short-term and long-term forecasts. We use relative operating characteristic (ROC) curves, which have been applied in a variety of fields including weather forecasting and radiology, to ascertain the directional accuracy of the forecasts. A ROC curve summarizes the directional accuracy of forecasts by comparing the rate of true signals (sensitivity) with the rate of false signals (one minus specifity). A ROC curve goes beyond market-timing tests widely studied in earlier research as this comparison is carried out for many alternative values of a decision criterion that discriminates between signals (of a rising inflation rate) and nonsignals (of an unchanged or a falling inflation rate). We find consistent evidence that forecasts contain information with respect to the subsequent direction of change of the inflation rate.

Timing the Market with a Combination of Moving Averages

AbstractA combination of simple moving average trading strategies with several window lengths delivers a greater average return and skewness as well as a lower variance and kurtosis compared with buying and holding the underlying asset using daily returns of value‐weighted US decile portfolios sorted by market size, book‐to‐market, momentum, and standard deviation as well as more than 1000 individual US stocks. The combination moving average (CMA) strategy generates risk‐adjusted returns of 2% to 16% per year before transaction costs. The performance of the CMA strategy is driven largely by the volatility of stock returns and resembles the payoffs of an at‐the‐money protective put on the underlying buy‐and‐hold return. Conditional factor models with macroeconomic variables, especially the market dividend yield, short‐term interest rates, and market conditions, can explain some of the abnormal returns. Standard market timing tests reveal ample evidence regarding the timing ability of the CMA strategy.

Do production managers predict turning points? A directional analysis

This study evaluates the directional accuracy of production managers' forecasts by using a new market-timing test. By extending the directional analysis to the 4×4 case, this study investigates whether Japanese production managers' forecasts correctly predict turning points in production across different industries. This fills a gap in the literature that focused on predicting increase/decrease or acceleration/deceleration using directional analysis of the 2×2 case. It also illustrates its merit over the 2×2 case. This study shows that majority of the forecasts are not useful in predicting turning points in production; however, they are useful in predicting increase/decrease in production. Our findings suggest that the production managers' forecasts serve as early qualitative information of expansion and contraction on the Japanese economy and their accuracy does not differ by phases of business cycles.

Directional analysis of consumers’ forecasts of inflation in a small open economy: evidence from South Korea

ABSTRACTWe evaluate the directional accuracy of consumers’ forecasts of inflation in predicting the movement of the actual CPI in a small open economy. In order to do so, we use a method developed by Pesaran and Timmermann (2009), based on South Korean data. By illustrating an application of the new market-timing test, we show that consumers’ expectations of inflation are not a useful predictor of the CPI in South Korea. Our findings suggest that the directional accuracy of consumers’ 1-year-ahead forecasts of inflation is not affected by the inflation targeting of the Bank of Korea. Our findings also suggest that consumers’ 1-year-ahead forecasts of inflation are scattered away from the Bank of Korea’s inflation target.

Directional analysis of fiscal sustainability: Revisiting Domar's debt sustainability condition

This study evaluates directional accuracy of long-term interest rate and nominal GDP growth forecasts made by the U.S. Congressional Budget Office (CBO), the Office of Management and Budget (OMB), and private forecasters by applying a recently developed market-timing test. This study also investigates whether these forecasts provide useful indicators of the well-known Domar's fiscal sustainability condition and whether directional accuracy differs between ruling parties and the state of the economy. This study finds that the CBO forecast for Domar's condition is useful with a two-year horizon, whereas OMB and private forecasts are only useful with a one-year horizon. The directional accuracy of the forecasts does not differ between expansion and recession.

Market Timing With Moving Averages

AbstractI present evidence that a moving average (MA) trading strategy has a greater average return and skewness as well as a lower variance compared to buying and holding the underlying asset using monthly returns of value‐weighted US decile portfolios sorted by market size, book‐to‐market, and momentum, and seven international markets as well as 18,000 individual US stocks. The MA strategy generates risk‐adjusted returns of 3–7% per year after transaction costs. The performance of the MA strategy is driven largely by the volatility of stock returns and resembles the payoffs of an at‐the‐money protective put on the underlying buy‐and‐hold return. Conditional factor models with macroeconomic variables, especially the default premium, can explain some of the abnormal returns. Standard market timing tests reveal ample evidence regarding the timing ability of the MA strategy.

Joint evaluation of the directional accuracy of federal budget forecasts

Most research focused on deficit, revenue and outlay in budget forecasts has addressed these issues separately. In this study, we investigate changes in budget forecasts from the Congressional Budget Office, applying a recently developed market-timing test. We find that the combined forecasts of revenue and outlay are useful with a horizon of 8 months in predicting an increase/decrease, and useful with a horizon of up to 20 months in predicting an acceleration/deceleration in the deficit.

Are consumer sentiments useful in Japan? An application of a new market-timing test

We investigate whether consumer sentiment in Japan is a useful predictor of household consumption, durable goods consumption and the CPI using a recently developed market-timing test. We find that consumer sentiment is not useful for predicting an increase/decrease in household consumption, durable goods consumption, and CPI. The findings suggest that policy-makers may have difficulties obtaining useful qualitative information from consumers. However, using estimated threshold values for the increase/decrease, consumer sentiment became a useful predictor of durable goods consumption and CPI. This suggests that estimating relevant thresholds could enhance the use of directional analysis.

Are production managers’ forecasts useful? Joint evaluation and robustness

We jointly evaluate the two directional changes (increase/decrease and acceleration/deceleration) in monthly manufacturing production activity predicted by production managers using a new market-timing test. Besides determining that the forecasts are useful in predicting an increase/decrease and acceleration/deceleration in monthly production activity, joint evaluation of the forecast illustrates the advantage of the new test. Moreover, we find that the results are broadly robust to two data vintages and outlying observations.

Purchasing and supply managers provide early clues on the direction of the US economy: An application of a new market-timing test

We evaluate the directional accuracy of Institute for Supply Management (ISM) indices in predicting the direction of the US economy direction; to do so, we make use of a method developed by Pesaran and Timmermann (2009). By illustrating an application of the new market-timing test and extending it to a joint evaluation of increase/decrease and acceleration/deceleration, we show that while the ISM indices are useful predictors of industrial production and employment with regard to monthly economic activity and to business cycle expansion/recession, they are not useful predictors of real gross domestic product or hours worked. Our findings suggest that the ISM indices broadly provide early qualitative information on the US economy. Our findings also suggest that the importance of the nonmanufacturing sector becomes clear when examining business cycles in the U.S.

Purchasing and Supply Managers Provide Early Clues on the Direction of the US Economy: An Application of a New Market-Timing Test

We evaluate the directional accuracy of the Institute for Supply Management indices to predict the US economy direction with a method developed by Pesaran and Timmermann (2009). By illustrating an application of the new market-timing test, we show that the Non-Manufacturing Index is a useful predictor of an increase/decrease and acceleration/deceleration in monthly economic activity, whereas the renowned Purchasing Managers’ Index is not. Our findings suggest that the non-manufacturing sector is important when examining US business cycles.

On the directional accuracy of survey forecasts: the case of gold and silver

We use a nonparametric market-timing test to study the directional accuracy of survey forecasts of the prices of gold and silver. We find that forecasters have market-timing ability with respect to the direction of change of the price of silver at various forecast horizons. In contrast, forecasters have no market-timing ability with respect to the direction of change in the gold price. Combining forecasts of both metal prices to set up a multivariate market-timing test yields no evidence of joint predictability of the directions of change of the prices of gold and silver.

Directional Accuracy of Production Managers’ Forecasts

We investigate the directional accuracy of disaggregated production manager forecasts by using a new market-timing test. We present evidence that forecasts for eleven individual industries and the aggregate manufacturing sector are useful predictors of both increases/decreases and acceleration/deceleration in monthly production activity. The results are broadly robust to outliers. We find that directional accuracy is more robust to outlying observations than are traditional error measures, including mean absolute error and root-mean-squared error. This finding may suggest that a directional accuracy measure can complement the traditional error measures to evaluate forecasting performance with different target variables.

On the Use of International Commodity Futures Spread for Forecasting China's Net Imports of Commodities

AbstractIn this paper, we show that the price spreads of copper and aluminium's futures in the London Metal Exchange (LME) and the Shanghai Futures Exchange (SHFE) have strong predictive power of China's net imports of the corresponding commodities 2 months later. The modified Diebold–Mariano test of Harvey et al. (International Journal of Forecasting, 13, 1997, 281) indicates that our futures‐based model significantly outperforms the ARIMA model and static model in terms of 1‐month‐ahead out‐of‐sample forecasts of net imports. Moreover, the market timing test of Clements (Evaluating Econometric Forecasts of Economic and Financial Variables, 2005, Palgrave Macmillan, Xxxxx) indicates that there is a significantly high correlation between the predicted signs of our model and the actual outcomes. When sorting all sign predictions according to the absolute magnitude of the out‐of‐sample movements, our proposed model achieves a 100 per cent forecasting accuracy for both copper and aluminium when predicting the largest movements at the top 10 percentile.

A New Simulation Based Market Timing Test and an Application to Technical Analysis

The performance analysis of investment strategies results sometime in a ambiguous conclusion; It yields higher returns than a benchmark; however, the various tests do not confirm this statistically. Here, we argue that this is due to the low power of some testing procedures, such as Student t-tests for equal means. First we show that these tests require a strategy mean return twice higher than the benchmark in standard stock market conditions in order to generate p-values lower than 5%. Thus, we propose a new performance measure based on the simulation of trading positions according to Markov chains. This allow us to keep the structure of the original trading positions. Then, we re-examine the moving average based strategies of Isakov and Marti (2011), which yield an annual mean returns that lie between 10.7% and 14.6% compared with only 6.1% for the benchmark. However, standard Student t-tests fail to reject the null hypothesis of equal means; the highest t-statistic being 1.2. With the proposed test, we found that the strategies high returns can not be achieved by taking random positions with a similar structure in the market. The economical performance is thus confirmed statistically. Finally, we perform a comprehensive Monte-Carlo analysis to illustrate the proposed test superior power compared with commonly used testing procedures in the technical analysis literature.

Are government and IMF forecasts useful? An application of a new market-timing test

We investigate the directional accuracy of GDP and price forecasts by the Japanese government and the IMF with a new method developed by Pesaran and Timmermann [Pesaran, M.H., Timmermann, A., 2009. Testing dependence among serially correlated multi-category variables. Journal of the American Statistical Association 485, 325–337]. Extending the literature to government forecasts, our results illustrate an empirical application of the new test. Our findings provide positive evidence about the usefulness of IMF forecasts whereas they cast doubts about government forecasts.

Are Government and IMF Forecasts Useful? An Application of a New Market-Timing Test

We investigate the directional accuracy of GDP and price forecasts by the Japanese government and the IMF with a new method developed by Pesaran and Timmermann [Pesaran, M.H., Timmermann, A., 2009. Testing dependence among serially correlated multi-category variables. Journal of the American Statistical Association 485, 32–337.] Extending the literature to government forecasts, our results illustrate an empirical application of the new test. Our findings provide positive evidence about the usefulness of IMF forecasts whereas they cast doubts about government forecasts.