Blackjack and the Market Timing Puzzle

Abstract

The objective of this paper is to establish that variation in market timing results can be attributed to the favorability of engaging in market timing strategies and not changes in investors behavior or skill. This hypothesis is very similar to the idea successfully tested in playing 21 by Thorpe in “Beat the Dealer” (1966). Just as the conditions of playing the game of blackjack switch from favoring the house to favoring the player, I propose that the conditions of the market can switch from favoring buy and hold investing to favoring market timing strategies and these conditions can be systematically measured in any equity market.

The MT-BH metric measures the favorability of engaging in market timing strategies in any equity trading market. The MT-BH metric was created for 44 country indexes from 1994-2008 to indicate which years were most favorable for market timing strategies. This study generalizes the market timing results of eight past studies covering mutual funds, stocks, option traders and individual investors across several US and International indexes. The MT-BH metric is particularly accurate in explaining the results for option traders and hedge fund managers. Academics and practitioners now have an additional metric from which to measure market timing skill of an investor or manager across any equity market.