Skip to main content
Download PDF
/v1/supplement/title

Tactical size rotation in Switzerland

Swiss Journal of Economics and Statistics volume 146, pages 553–576 (2010)Cite this article

Summary

The size premium, defined as the return differential between shares of small and large companies, is subject to cyclical fluctuations. This study examines the predictability of this premium for the Swiss stock market applying a new and flexible forecasting approach. Our strategies provide promising information ratios. The results show that risk variables (VIX, TED spread, etc.), the performance of the S&P 500 and statistical variables such as AR(1) terms or trends prove to be successful forecasting variables in our algorithm. Furthermore, variables that sum up the consensus estimates of equity analysts (IBES) make valuable forecast contributions.

References

  • Amenc, Noel, Philippe Malaise, Lionel Martellini and Daphne Sfeir (2003), “Tactical Style Allocation? A New Form of Market Neutral Strategy”, The Journal Of Alternative Investments, 6(1), pp. 8–22.

    Article  Google Scholar 

  • Ammann, Manuel, and Michael Steiner (2008), “Risk Factors for the Swiss Stock Market”, Swiss Journal of Economics and Statistics, 144(1), pp. 1–35.

    Article  Google Scholar 

  • Arshanapalli, Bala G., Lorne N. Switzer and Karim Panju (2007), “Equity Style Timing: A Multi-Style Rotation Model for the Russell Large-Cap and Small-Cap Growth and Value Style Indexes”, Journal of Asset Management, 8(1), pp. 9–23.

    Article  Google Scholar 

  • Banz, Rolf W. (1981), “The Relationship between Return and Market Value of Common Stocks”, Journal of Financial Economics, 9, pp. 3–18.

    Article  Google Scholar 

  • Bauer, Rob, Jeroen Derwall and Roderick Molenaar (2004), “The Real-Time Predictability of Size and Value Premium in Japan”, Pacific-Basin Finance Journal, 12(5), pp. 503–523.

    Article  Google Scholar 

  • Bernanke, Ben, Mark Gertler and Simon Gilchrist (1996), “The Financial Accelerator and the Flight to Quality”, Review of Economics and Statistics, 58, pp. 1–15.

    Google Scholar 

  • Bhardwaj, Ravinder K., and Leroy D. Brooks (1993), “Dual Betas and Bear Markets: Reversal of the Size Effect”, Journal of Financial Research, 16, pp. 269–283.

    Article  Google Scholar 

  • Brown, R., J. Durbin and J. Evans (1975), “Techniques for Testing the Constancy of Regression Relationships Over Time”, Journal of Royal Statistical Society, 37, pp. 405–428.

    Google Scholar 

  • Carhart, Mark (1995), Survivor Bias and Persistence in Mutual Fund Performance, Chicago.

  • Chan, Ka-Keung, and Nai-Fu Chen (1988), “An Unconditional Asset-Pricing and the Role of Firm Size as an Instrumental Variable for Risk”, Journal of Finance, 43, pp. 309–325.

    Article  Google Scholar 

  • Chan, Louis K., Jason Karaceski and Josef Lakonisch (2000), “New Paradigm or the Same Old Hype in Equity Investing?”, Financial Analyst Journal, 56(4), pp. 23–36.

    Article  Google Scholar 

  • Chu, Chia-Sung J., Maxwell Stinchcombe and Halbert White (1996), “Monitoring Structural Change”, Econometrica, 64, pp. 1045–1065.

    Article  Google Scholar 

  • Cooper, Michael J., Huseyin Gulen and Maria Vassalou (2001), “Investing in Size and Book-to-Market-Portfolios Using Information about the Macroeconomy: Some New Trading Rules”, Working Paper, Columbia University New York.

  • Copeland, Maggie M., and Thomas E. Copeland (1999), “Market Timing: Style and Size Rotation using VIX”, Financial Analyst Journal, 55(2), pp. 73–81.

    Article  Google Scholar 

  • Dickey, David A., and Wayne A. Fuller (1979), “Distribution of the Estimators for Autoregressive Time Series with a Unit Root”, Journal of the American Statistical Association, 74, pp. 427–431.

    Google Scholar 

  • Diepold, Francis X., and Jose A. Lopez (1996), “Forecast Evaluation and Combination”, in: Gangadharrao Soundalyarao Maddala and Calyampudi Radhakrishna Rao (ed.), Handbook of Statistics, 14, pp. 241–268.

    Article  Google Scholar 

  • Fama, Eugene F., and Kennet R. French (1992), “The Cross Section of Expected Returns”, Journal of Finance, 47, pp. 427–465.

    Article  Google Scholar 

  • Fama, Eugene F., and Kennet R. French (1993), “Common Risk Factors in the Returns of Stocks and Bonds”, Journal of Financial Economics, 33, pp. 3–56.

    Article  Google Scholar 

  • Fama, Eugene F., and Kennet R. French (1998), “Value versus Growth: The International Evidence”, Journal of Finance, 53 (6), pp. 1975–2000.

    Article  Google Scholar 

  • Gertler, Marc, and Simon Gilchrist (1994), “Monetary Policy, Business Cycles, and the Behavior of Small Manufacturing Firms”, Quarterly Journal of Economics, 109, pp. 309–340.

    Article  Google Scholar 

  • Greene, William H. (2000), Econometric Analysis, New York.

  • Hodrick, Robert J., and Edward Prescott (1997), “Postwar U.S. Business Cycles: An Empirical Investigation”, Journal of Money, Credit and Banking, 29, pp. 1–16.

    Article  Google Scholar 

  • Johnston, Jack, and John Dinardo (1997), Econometric Methods, New York.

  • Lakonishok, Josef, Andrei Shleifer and Robert W Vishny (1994), “Contrarian Investment, Extrapolation and Risk”, Journal of Finance, 49, pp. 1541–1578.

    Article  Google Scholar 

  • Leistikow, Dean, and Susana Yu (2006), “VIX Signalled Switching for Style-Differential and Size-Differential Short Term Stock Investing”, Finance Letters, 5(6).

  • Levis, Mario, and Manolis Liodakis (1999), “The Profitability of Style Rotation Strategies in the United Kingdom”, Journal of Portfolio Management, 26(1), pp. 73–86.

    Article  Google Scholar 

  • Lewellen, Jonathan (1999), “The Time-Series Relations Among Expected Return, Risk and Book-To-Market”, Journal of Financial Economics, 54(1), pp. 5–43.

    Article  Google Scholar 

  • Lucas, Andre, Ronald van Dijk and Tuen Kloek (2002), “Stock Selection, Style Rotation, and Risk”, Journal of Empirical Finance, 9(1), pp. 1–34.

    Article  Google Scholar 

  • Mackinnon, James G. (1996), “Numerical Distribution Functions for Unit Root and Cointegration Tests”, Journal of Applied Econometrics, 11(6), pp. 601–618.

    Article  Google Scholar 

  • Moon, Kim K., and David A. Burnie (2002), “The Firm Size Effect and the Economic Cycle”, The Journal of Financial Research, 25(1), pp. 111–124.

    Article  Google Scholar 

  • Nalbantov, Georgi, Rob Bauer and Ida Springkhuizen-Kuyper (2006), “Equity Style Timing Using Support Vector Regressions”, Applied Financial Economics, 16, pp. 1095–1111.

    Article  Google Scholar 

  • Newey, Whitney K., and Kenneth D. West (1987), “A Simple Positive Semi-Definite, Heteroskedasticity and Autocorrelation Consistent Covariance Matrix”, Econometrica, 55, pp. 703–708.

    Article  Google Scholar 

Download references

Author information

Authors and Affiliations

  1. University of Applied Science Amberg-Weiden, Hetzenrichter Weg 15, D-92637, Weiden, Germany

    Thorsten Hock (Professor of Finance and former Head of Quantitative Research at Zurich Kantonalbank)

Authors
  1. Thorsten Hock
    View author publications

    You can also search for this author in PubMed Google Scholar

Corresponding author

Correspondence to Thorsten Hock.

Additional information

The author would like to thank the anonymous referees for their valuable comments.

Rights and permissions

Open Access This article is distributed under the terms of the Creative Commons Attribution 2.0 International License ( https://creativecommons.org/licenses/by/2.0 ), which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited.

Reprints and permissions

About this article

Cite this article

Hock, T. Tactical size rotation in Switzerland. Swiss J Economics Statistics 146, 553–576 (2010). https://doi.org/10.1007/BF03399327

Download citation

  • Published:

  • Issue Date:

  • DOI: https://doi.org/10.1007/BF03399327

JEL-Classification

Keywords