Intermarket timing equity investments in the United States and Singapore: potential gains and required predictive ability

Abstract

In the aftermath of the market crash of October 1987, there has been significant interest in quantitative models designed to position asset mixes based upon a short-term outlook for the financial markets. Unlike strategic (long-term) and tactical (short-term) asset allocation models, which are based upon fundamental market valuations and risk constraints, market timing attempts to predict movements in financial markets as the basis for short-term shifts in asset mixes, with the primary objective being to maximize returns. In accordance with changing outlooks for the market, market timers shift asset allocations frequently and often move to extreme positions. For example, assets are shifted into common stock during bull markets and cash equivalents during bear markets.