When to Time in the Stock Market: An International
Examination of Factors that Influence Market Timing

Abstract

The objective of this study is to determine if readily available finance and macro-economic variables can explain which years have favored market timing strategies versus which years favored buy and hold investing, in order to help traders determine when to allocate funds from passive to active investment strategies. We find that when real GDP growth rates, inflation rates, and PE ratios were low or negative, and when dividend yields were high, market timing strategies were favorable across 44 country market indexes from 1995–2008. These results are robust to country level of development, negative market return years, and other control variables.

The conditions for pursuing market timing strategies were time-variant and detectable with macro-economic and finance variables. We introduce and test a new metric, Market Timing–Buy and Hold (MTBH), which measures the conditions of pursuing market timing strategies relative to buy and hold investing. The MTBH metric is an ex post measure that allows one to examine when it has been advantageous to switch from buy and hold investing to a market timing strategy using macro-economic and financial variables.