Market Timing with Cay

Abstract

We test whether market-timing strategies using deviations from the long-run log consumption-wealth ratio (cay) deliver superior investment perfomance. Using several statistical tests, we conclude that true cay contains economically significant information about future market returns. However, constraints such as the need of using estimated rather than true cay and the delays in availability of macroeconomic data cast doubt over the possibility of timing the market via mechanistic strategies based on cay. Further research is needed to ascertain whether successful timing strategies based on cay can be implemented.

Keywords: Market Timing, Investments, CAY