n Studies in Economics and Econometrics - Predictive models to determine market timing opportunities for the JSE (II)

Abstract

As shown in the first article, it is possible to develop a mathematical forecasting model which can be used to out-perform the JSE AII Share Index (ALSI) by switching between the ALSI and cash on a monthly basis.

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The objective of this study is to establish whether this is still the case after allowing for risk, using the Sharpe ratio, Treynor ratio and Jensen's alpha. It was established that the best models were able to out-perform the ALSI by about 5% per year on a cost adjusted basis, with a significantly reduced risk level.

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Model results were also analysed using the Treynor Mazuy (TM) model and the Henriksson Merton (HM) model to determine the market timing capabilities of the models. The calculated parameters from both the TM and HM models confirmed that the predictive models do indeed have some market timing capabilities.