Market Timing Rule with Dividend Yield

    This market-timing strategy uses the dividend yield of the target security as an indicator to predict future stock market return. In this strategy, stocks are supposed to be sold when the indicator fall below the predefinded threshold value, and vice versa. It also has “delay day” and “waiting day” settings.

    Many investors assume that stock prices do not wander too far from their normal levels relative to such fundamental values as earnings, dividends, and book value, but revert back to their normal levels after periods of deviation. That is, financial ratios are assumed to  fluctuate within historical ranges and to be positively related to expected returns. Fama and French (1989), and Campbell and Shiller (2001), among others, argue that the dividend yield and the E/P ratio have predictive power. However, Fisher and Statman (2006a) and Fisher and Statman (2006b) also investigate the success of market timing based on financial ratios and find that the performance of buy-and-hold investors is usually higher than that of various timing rules based on E/P ratios and dividend yields.

    In this Strategy, for the dividend yield, rising above a certain threshold is considered to be a switch signal from holding cash to investing in S&P 500 Index, and vice versa. If the same switch signal persists for “delay days”, we switch the trading position. And in the succeeding “waiting days” we keep the position ignoring the new switch signals. The signals are examined every trading day.

    Threshold can set to be certain fix values or SMA (Simple moving average) of certain days. The BuySecurity should only be set as ^GSPC or VFINX. And the Portfolio StartDate should not be set to the date earlier than 01/02/1990 due to lack of data.

 

Parameters used in the created portfolio:

Indicator: Dividend yield of security

 

TresholdValue: 0.015, 0.025, SMA 30days (default), SMA 120days

WaitingDay:1 day, 5 days (default)

DelayDay: 1 day, 5 days (default)

BuySecurity: ^GSPC (default) , VFINX

     

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