The Influence of Market States on Security Returns
29 Pages Posted: 18 Aug 2014 Last revised: 16 Jun 2015
Date Written: March 17, 2014
Abstract
This empirical study considers the impact of market states on future industry returns. We investigate whether an industry’s past relative performance in the same market state as the current market state predicts the industry’s future performance. This new approach sorts industries into portfolios to test whether market states can be used to construct profitable dynamic industry rotation strategies. We argue that the results provides strong evidence that market states predict future industry returns.
Keywords: Market states, industry, predictive effects, predictive returns
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