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It Takes Two to Tango: Fundamental Timing in Stock Market

Last Updated on 10 February, 2024 by Rejaul Karim

In their forthcoming contribution to the International Journal of Finance & Economics, “It Takes Two to Tango: Fundamental Timing in Stock Market,” Guohao Tang, Fuwei Jiang, Xinlin Qi, and Nan Huang choreograph a groundbreaking dance with fundamental timing strategies in both the U.S. and Chinese stock markets. Introducing a captivating routine based on moving average (MA) timing signals, the authors unveil a performance spectacle that outshines traditional buy-and-hold fundamental strategies.

The 20-day MA fundamental timing strategy takes center stage, delivering an annualized average return of about 37% with a dazzling Sharpe ratio approaching 1.30. Resilient against Fama-French factor model adjustments and alternative signal parameters, this performance artistry remains unyielding.

Tang, Jiang, Qi, and Huang’s work demystifies the fundamental timing premium, revealing its independence from market timing and business cycles, while spotlighting its heightened profitability amidst high idiosyncratic volatility and illiquidity measures.

Abstract Of Paper

In this paper, we propose a fundamental timing strategy in both U.S. and Chinese stock market to trade the fundamental 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 improvements relative to corresponding buy-and-hold fundamental strategies. The annualized average return of the 20-day MA 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, we find that the fundamental timing premium cannot be explained by market timing ability or business cycle, and fundamental timing is more profitable among firms with high idiosyncratic volatility and high illiquidity measures.

Original paper – Download PDF

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Author

Guohao Tang
Hunan University – College of Finance and Statistics

Fuwei Jiang
Central University of Finance and Economics (CUFE)

Xinlin Qi
Industrial and Commercial Bank of China (ICBC), Global Market Dept.

Nan Huang
Harvest Fund Management Co., Ltd.

Conclusion

In conclusion, our study introduces a groundbreaking fundamental timing strategy, examining its efficacy in both the U.S. and Chinese stock markets. Focused on fundamental sorted portfolios such as value and profitability, our approach employs moving average (MA) timing signals, revealing substantial performance enhancements compared to conventional buy-and-hold fundamental strategies.

The 20-day MA fundamental timing strategies exhibit an impressive annualized average return of approximately 37%, accompanied by a Sharpe ratio of nearly 1.30. These results withstand rigorous testing, including Fama-French factor model adjustments, varied lag lengths of MA signals, holding days, and consideration of transaction costs.

Notably, the fundamental timing premium remains unattributed to market timing or business cycles, proving particularly lucrative for firms with high idiosyncratic volatility and elevated illiquidity measures.

Related Reading:

What Goes up Must Not Come Down – Time Series Momentum in Factor Risk Premiums

Short-Term Residual Reversal

FAQ

Q1: What is the key focus of Tang, Jiang, Qi, and Huang’s research, and what makes their fundamental timing strategy distinctive?
A1: The authors focus on proposing a fundamental timing strategy for trading fundamental sorted portfolios, such as value and profitability, in both U.S. and Chinese stock markets. Their strategy employs moving average (MA) timing signals, which distinguishes it from traditional buy-and-hold fundamental approaches.

Q2: What are the key performance metrics of the 20-day MA fundamental timing strategy, and how do these results compare to conventional buy-and-hold fundamental strategies?
A2: The 20-day MA fundamental timing strategy delivers an impressive annualized average return of around 37%, accompanied by a Sharpe ratio approaching 1.30. This performance outshines conventional buy-and-hold fundamental strategies, showcasing the efficacy of the dynamic MA timing signals.

Q3: What factors contribute to the robustness of the fundamental timing premium, and how does the strategy perform in terms of idiosyncratic volatility and illiquidity measures?
A3: The fundamental timing premium remains robust against Fama-French factor model adjustments and variations in signal parameters, holding days, and transaction costs. Additionally, the strategy proves more profitable among firms with high idiosyncratic volatility and elevated illiquidity measures, emphasizing its resilience and profitability in specific market conditions.

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