Asia-Pacific Journal of Business (아태비즈니스연구)

KNU The Institute of Management & Economy Research (강원대학교 경영경제연구소)
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A Study on Stock Market Cycle and Investment Strategies

주식시장국면 예측과 투자전략에 대한 연구

  • Kyoung-Woo Sohn (Department of Commerce and Trade, Korea National Open University) ;
  • Ji-Yeong Chung (Department of International Economics, Hanshin University)
  • 손경우 (한국방송통신대학교 무역학과) ;
  • 정지영 (한신대학교 국제경제학과)
  • Received : 2022.11.30
  • Accepted : 2022.12.23
  • Published : 2022.12.30
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Abstract

Purpose - This study investigates the performance of investment strategies incorporating estimated stock market cycle based on a lead-lag relationship between business cycle and stock market cycle, thereby deriving empirical implications on risk management. Design/methodology/approach - The data period ranges from June 1953 to September 2022 and de-trended short rate, term spread, credit spread, stock market volatility are considered as major input variables to estimate business cycle and stock market cycle by applying probit model. Based on the estimated stock market cycle, two types of strategies are constructed and their performance relative to the benchmark is empirically examined. Findings Two types of strategies based on stock market cycle are considered: The first strategy is to long(short) on stocks when stock market stage is expected to be an expansion(a recession), and the second one is to long on stocks(bonds) when expecting an expansion(a recession). The empirical results show that the strategies based on stock market cycle outperforms a simple buy and hold strategy in both in-sample and out-of-sample investigation. Also the out-of-sample evidence suggests that the second strategy which is in line with asset allocation is more profitable than the first one. Research implications or Originality The strategies considered in this study are based on the estimated stock market cycle which only depends on a few easily available financial variables, thereby making easier to establish such a strategy. It implies that investors enhance investment performance by constructing a relatively simple trading strategies if they set their position on stocks or choose which asset class to buy conditioning on stock market cycle.

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References

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